Abstract
Purpose - This paper examines the association between audit quality and value relevance of representative accounting measures, such as earnings and book value of equity.Design/methodology/approach - We estimate the standard value relevance equations and our modified equations by ordinary least square regressions. We use two ways to compare the difference in the value relevance of earnings and book value of equity audited by Big 4 auditors and non-Big 4 auditors, as characterized by the coefficient of determination, R2 based on prior research by Collins, Maydew, and Weiss (1997), Barth, Beaver, and Landsman, (1998), Brown, Lo, and Lys (1999), Francis and Schipper (1999), and Collins, Pincus, and Xie (1999), and Lev and Zarowin (1999), respectively.Findings - We find some evidence that, in the Taiwan capital market, in general, the earnings and book value of equity audited by Big 4 auditors explain more variations in stock return than those audited by non-Big 4 auditors. The results are robust to different empirical models and measurements of value relevance and control for risk and growth factors. Consequently, both earnings and book value audited by Big 4 audit firms are generally more relevant than those audited by non-Big 4 audit firms.Originality/value - Assuming that the Big 4 audit firms provide a higher level of assurance and credibility, the overall results are generally consistent with our prediction that audit quality, as captured by size of audit firms, improves the value relevance of earnings and book value of equity.
Purpose - This paper examines the association between audit quality and value relevance of representative accounting measures, such as earnings and book value of equity.Design/methodology/approach - We estimate the standard value relevance equations and our modified equations by ordinary least square regressions. We use two ways to compare the difference in the value relevance of earnings and book value of equity audited by Big 4 auditors and non-Big 4 auditors, as characterized by the coefficient of determination, R2 based on prior research by Collins, Maydew, and Weiss (1997), Barth, Beaver, and Landsman, (1998), Brown, Lo, and Lys (1999), Francis and Schipper (1999), and Collins, Pincus, and Xie (1999), and Lev and Zarowin (1999), respectively.Findings - We find some evidence that, in the Taiwan capital market, in general, the earnings and book value of equity audited by Big 4 auditors explain more variations in stock return than those audited by non-Big 4 auditors. The results are robust to different empirical models and measurements of value relevance and control for risk and growth factors. Consequently, both earnings and book value audited by Big 4 audit firms are generally more relevant than those audited by non-Big 4 audit firms.Originality/value - Assuming that the Big 4 audit firms provide a higher level of assurance and credibility, the overall results are generally consistent with our prediction that audit quality, as captured by size of audit firms, improves the value relevance of earnings and book value of equity.