Audit opinions and information asymmetry in the stock market

Abstract

This study analyses the relationship between the content of the audit reports and information asymmetry levels in the stock market for a sample of Spanish firms. By implementing an association study, we document (1) that firms with audit qualifications show higher information asymmetry levels than those with unqualified opinions; (2) firms with non‐quantified qualifications show higher informational asymmetry than firms with quantified qualifications; and (3) we find a stronger effect on the level of informational asymmetry in the case of going concern qualifications. Our findings suggest that audit qualifications reporting more uncertainty on firm accounting statements result in higher adverse selection risk.

Predicting the type of auditor opinion: Statistics, machine learning, or a combination of the two?

“…16% in Spain, 2% in Germany, 0.5% in Austria, 3.7% in Switzerland, 1.3% in France, and 0.5% in the United Kingdom (Blandón and Bosch, 2013;Gassen and Skaife, 2009), and other parts of the world, e.g. 13% in the US and 11% in China (Abad et al, 2017;Dhaliwal et al, 2014), the results of the study may only be generalized to a smaller number of countries with unusually high frequencies of qualified audit opinions. In light of this, future studies should consider using different techniques for dealing with class imbalance.…”

Determinants of Capital Structure within the Context of Corporate Governance in Egypt

“…Further, they offered the first indication that asymmetric information influences the corporate capital structure choices of US companies. In addition, the results of Abad et al (2017) show that the information asymmetry among the managers and investors are decreased when the financial statements are audited by one of the big 4 firms, where investors can assume enhanced future earnings on the stock exchange. Consequently, this paper considers the effect of the information environment on the corporate capital structure for the Egyptian companies.…”

Auditor Reporting and Corporate Debt Structure

“…A majority of studies examines the impact that audit opinions have in the stock market. For example, Abad et al (2017) analyze whether qualified audit reports are related to information asymmetry in the stock market. They predict and find that, relative to firms with clean audit opinions, firms with qualified audit opinions are more likely to display information asymmetry because qualified opinions may cause concerns about the credibility of firms' financial statements.…”

“…Modified audit opinions deliver warning signals about firms' financial statement quality and creditworthiness. Prior empirical studies find that capital providers perceive modified audit opinions as an indication of low-quality financial information Abad et al, 2017). Firms with lower quality of financial information experience more severe shareholder-debtholder agency costs, leading to higher demand to utilize debt contract as a way of decreasing such costs (Wang et al, 2017).…”

“…A majority of studies examines the impact that audit opinions have in the stock market. Prior studies show that qualified audit reports decrease earnings response coefficients as well as increase information asymmetry in the stock market and firms' cost of equity (Choi and Jeter, 1992;Menon and Williams, 2010;Ianniello et al, 2015;Amin et al, 2014;Abad et al, 2017). Some studies assess the impact that audit opinions have in the debt market.…”