The Effect of Auditor’s Characteristics on the Future Stock Price Crash Risk

Iranian Journal of Accounting, Auditing and Finance

مقاله 6، دوره 6، شماره 2 - شماره پیاپی 19، مرداد 2022، صفحه 83-95   

نوع مقاله: Original Article

شناسه دیجیتال (DOI): 10.22067/ijaaf.2022.41840

نویسندگان

Faramarz Lotfi؛ Ali Akbar Ramezani^* ؛ Seyedhossein Naslmousavi

Department Of Accounting, Qaemshahr Branch, Islamic Azad University, Qaemshahr, Iran

چکیده

Negative skewness is among the features of crash risk that finally result in more volatility in the negative return. The contributing factors to stock price crash risk spread at the firm level, but the agency cost brings about information asymmetry. Should the information asymmetry between managers and investors be high, negative news about the firms would not transfer to the capital market on time, so when negative information holding passes the threshold, it will spread rapidly in the market and causes a drop in the stock price. According to the empirical observations, corporate governance is designed to decline agency cost and stock price crash risk. Hence, we can consider the auditors as a type of corporate governance effective in reducing agency costs and information asymmetry, so the objective of the present study is to assess the effect of auditor’s characteristics on future stock price crash risk. To reach the study's objective, 90 listed firms on the Tehran Stock Exchange were analyzed for 9 years from 2011 to 2019 using the descriptive-correlation analysis method and the multivariate regression test. The results of this study proved a significant and negative relationship between the auditor's characteristics ( such as consistency in the unqualified opinion and improved audit opinion) and the risk of the stock prices crash in the future. These findings reinforce the role of the audit report in evaluating the reliability of financial reporting and verifying that the auditor’s opinion impacts the market analysis. The results also show that the market can distinguish between the various types of auditors' opinions. Also, they show a negative and significant relationship between an auditor’s characteristics (the tenure of the auditor) and the risk of the characteristics stock prices crash in future. The empirical observations of this study are consistent with the supervised learning paradigm (theory). By showing that the auditors’ characteristics reduce the existing risk in financial markets, the present study contributes to the literature on determining factors in stock price crash risk and is the first study to assess the effect of improved and consistent qualified auditor’s opinion on future stock price crash risk. 

کلیدواژه‌ها

Auditor’s Tenure؛ Future Stock؛ Improved Auditor’s Opinion؛ Stock Price Crash Risk؛ Qualified Opinion

مراجع

1. Al-Othman, L. N . (2019). The Reaction of the Financial Market on the Auditor Report: an Empirical Study on Service Companies listed in Amman Stock Exchange (ASE). Investment Management and Financial Innovations, 16(1). http://dx.doi .org /10.21511/imfi.16(1).2019.21.
2. American Institute of Certified Public Accountants (AICPA). (1978). Report of the commission on auditors’ responsibilities. The Cohen Commission. New York: AICPA.
3. Arens, A.A., Elder, R.J. & Beasley, M.S. (2008), Auditing and assurance services. An Integrated Approach. 12th Edition. Pearson / Prentice Hall. Education. New Jersey. Hall.https://lib.ugent.be/catalog/rug01:001656781.
4. Arens, A.A., Elder, R.J. & Beasley, M.S. (2015). Auditing and Assurance Services. Pearson Education Ltd, 15th Edition.
5. Beck, P. J., & Wu, M. G. H. (2006). Learning by doing and audit quality. Contemporary Accounting Research, 23(1): 1–30. https://doi.org/10.1506/AXU4-Q7Q9-3YAB-4QE 0.
6. Cahyaning Wibowo.A.,(2019). Analysis of Going Concern Audit Opinion Issuance. International Journal of Managerial Studies and Research (IJMSR).7(12): 70-75. http://dx.doi.org/10.20431/2349-0349.0712010 www.arcjournals.org.
7. Callen, J. L., & Fang, X. (2017). Crash risk and the auditor–client relationship. Contemporary Accounting Research, 34(3): 1715-1750. https://doi.org/10.1111/1911-3846.12311.
8. Chen, J., Hong, H.,& Stein, J.C.,(2001). Forecasting crashes: Trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61(3): 345–381. https://doi.org/10.1016/S0304-405 X (01)00066-6.
9. Chua, J., Fangb, J., Kimc, J.B., & Zhou, Y.(2019). Stock price crash risk and auditor-client contracting. China Journal of Accounting Studies, 7(2): 184–213. https://doi.org/10.1080/21697213.2019.1661 169.
10. Cullinan, C.P., Wang, F., Yang, B.,& Zhang, J.(2012). Audit opinion improvement and the timing of disclosure. Advances in Accounting, incorporating Advances in International Accounting, 28:333-343. https:// doi.org/10.1016/j.adiac.2012.09.010.
11. Danescu,T.,& Spatacean,O.(2018). Audit opinion impact in the investors’ perception – empirical evidence on Bucharest Stock Exchange. Audit financial, 1(149):111-121. http://dx.doi.org/10.20869/AUDITF/2018/149/003.
12. Davis, L. R., Soo,B., & Trompeter,G. (2009). Auditor tenure and the ability to meet or beat earnings forecasts. Contemporary Accounting Research, 26 (2): 517-48. https://doi.org/10.1506/car.26.2.8.
13. De Fond, M. L., Hung, M., Li, S., & Li, Y. (2015). Does mandatory IFRS adoption affect crash risk? Accounting Review, 90(1): 265–299. https://www. jstor. org/ stable/ 24467271
14. Financial Crisis Inquiry Commission, (2011). The financial crisis inquiry report: final report of the national commission on the causes of the financial and economic crisis in the United States. Available online at http://purl.fdlp.gov/GPO/gpo3449.
15. Firth, M. (1978). Qualified Audit Reports: Their Impact On Investment Decisions. The Accounting Review, 53(3):642-650. https://www.jstor.org/stable/245672.
16. Habib, A.,& Jiaying Huang, H. (2019). Abnormally long audit report lags and future stock price crash risk: evidence from China, International Journal of Managerial Finance, 15(4): 611-635. https://doi.org/10.1108/IJMF-07-2018-0213.
17. Hong, H., & Stein, J.C. (2003). Differences of Opinion, Short-Sales Constraints, and market crashes. The Review of Financial Studies. 16: 487-525.http://dx .doi.org/10.1093/rfs/hhg006.
18. Hutton, A.P., Marcus, A.J., & Tehranian, H. (2009). Opaque financial reports, R2, and crash risk. Journal of Financial Economics, 94(1):67–86. https:// doi. Org /10.1016/j.jfineco.2008.10.003.
19. Ianniello, G., & Galloppo,G.(2015). Stock market reaction to auditor opinions - Italian evidence. Manajerial Auditing Journal, 30(6):. 610-632. https://doi. org/10 .1108/MAJ-06-2014-1045.
20. Ittonen, K. (2012). Market Reactions to Qualified Audit Reports: Research Approaches, Accounting Research Journal, 25 (1),:8-24. http://dx.doi. org/10. 2139/ ssrn.1978759.
21. Jin, L., & Myers, S.C. (2006). R2 around the world: New theory and new tests. Journal of Financial Economics, 79(2):257–292. https://doi. org/10. 1016/j .j fineco.2004.11.003.
22. Johnson, V., Khurana, L.,& Reynolds, J. (2002). Audit firm tenure and the quality of financial reports. Contemporary Accounting Research, 19 (4):637-60. https://doi.10. 1506/LLTH-JXQV-8CEW-8MXD.
23. Kim, J.-B., & Zhang, L. (2014). Financial reporting opacity and expected crash risk: Evidence from implied volatility smirks. Contemporary Accounting Research, 31(3): 851–875. https://doi.org/10.1111/1911-3846.12048.
24. Kim, J.-B., & Zhang, L. (2016). Accounting conservatism and stock price crash risk: Firm-level evidence. Contemporary Accounting Research, 33(1):412–441. https://doi. org/10.1111/1911-3846.12112.
25. Kim, J.-B., Li, L., Lu, L.Y., & Yu, Y. (2016). Financial statement comparability and expected crash risk. Journal of Accounting and Economics, 61(2–3): 294–312. https://doi.org/10.1016/j.jacceco.2015.12.003.
26. Kim, J.-B., Li, Y., & Zhang, L. (2011a). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics, 100(3): 639–662. https://doi.org/10.1016/j.jfineco.2010.07.007.
27. Kim, J.-B., Li, Y., & Zhang, L. (2011b). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics, 101(3):713–730. https://doi. org/10.1016/j.jfineco.2011.03.013.
28. Kim, J.-B., Wang, Z., & Zhang, L. (2016). CEO overconfidence and stock price crash risk. Contemporary Accounting Research, 33(4):1720–1749. https://doi. org/10.1111 /1911-3846.12217.
29. Kipkosgei, T.C. (2010). The effect of modified audit opinions on share prices for companies quoted at the Nairobi stock exchange. The University of Nairobi. http://erepository.uonbi.ac.ke:8080/xmlui/handle/123456789/13998.
30. Kyriakou, M.I & Dimitras, A.I. (2018). Impact of auditor tenure on audit quality: European evidence. Investment Management and Financial Innovations, 15(1):374-386. http://dx.doi.org/10.21511/imfi.15(1).2018.31.
31. Mautz, R. K., & Sharaf, H. A. (1961). The philosophy of auditing. Sarasota, FL: American Accounting Association.http://lib .ugent.be/catalog/ rug01: 0021 58274.
32. Melumad, N. D., & Ziv, A.(1997). A Theoretical Examination of the Market Reaction to Auditor's Qualifications. Journal of Accounting Research, 35(2): 239-256. https://doi.org/10.2307/2491363 .
33. Muslih,M., & Nuryatno Amin, M.(2018). The Influence of Audit Opinion on the Company Stock Price. Proceeding International Seminar on Accounting for Society, 1(1). http://openjournal.unpam.ac.id/index.php/Proceedings/article/download/1840/1536.
34. Price water house Coopers LLP (PricewaterhouseCoopers). (2013). Point of view: Mandatory audit firm rotation – other changes would be better for investors. New York, NY: PricewaterhouseCoopers.
35. Public Company Accounting Oversight Board (PCAOB). (2010). Report on observations of PCAOB inspectors related to audit risk areas affected by the economic crisis. Release No. 2010-006. Washington, D.C.: PCAOB.
36. Public Company Accounting Oversight Board (PCAOB). (2011b). Concept release on possible revisions to PCAOB standards related to reports on audited financial statements. Release No. 2011-003. Washington, D.C.: PCAOB.
37. Public Company Accounting Oversight Board (PCAOB). 2011a. Concept release on auditor independence and audit firm rotation. Release No. 2011-006. Washington, D.C.: PCAOB.
38. Purba, M. P. (2009). Asumsi Going Concern: Suatu Tinjauan Terhadap Dampak Krisis Keuangan atas Opini Audit dan Laporan Keuangan. Yogyakarta: Graha Ilmu.
39. Robin, A.J., & Zhang, H. (2015). Do industry-specialist auditors influence stock price crash risk?. Auditing: A Journal of Practice & Theory, 34(3): 47–79. http://dx. doi. org/10.2139/ssrn.2169099
40. Selahatdin Kelten,G.,& Sarıtas,H.(2020). The Effect of Annual Independent Audit Reports on Stock Market Performance: Evidence from Turkey and Germany. Eskisehir Osmangazi Universitesi IIBF Dergisi, 15( 2):389 – 410. https://doi.10.17153/ OGU IIBF.528777
41. Su, L., Zhao, X. & Zhou, G. (2016). Auditor Tenure and Stock Price Idiosyncratic Volatility: The Moderating Role of Industry Specialization, Auditing: A Journal of Practice & Theory, 35(2):147–166. https://doi.org/10.2308/ajpt-51256 .
42. Tahinakis, P., John,M.,& Evaggelia,D. (2010). An Appraisal of the Impact of Audit Qualifications on Firms‘ Stock Exchange Price Fluctuations. Inventi Impact: microfinance & banking, 2(1): 86-99. https://doi.org/10.5296/erm.v2i1.335.
43. Wang, H., Cao, F., & Ye, K. (2015). Monitoring or tunnelling? The proportion held by big shareholders and stock price crash risk. Management World, 2: 53–65.
44. Wanis, E.A.(2021). The Impact of Audit Quality on The Relationship between Ownership Structure and Stock Price Crash Risk in Egypt. Academy of Accounting and Financial Studies Journal, 25(6):1-15.
45. Xu, N., Li, X., Yuan, Q., & Chan, K. (2014). Excess perks and stock price crash risk: Evidence from China. Journal of Corporate Finance, 25:419–434. https:// 10.1016/j.jcorpfin.2014.01.006.
46. Xu, N., Yu, S., & Yi, Z. (2013). Institutional investor herding behavior and stock price crash risk. Management World, 7: 31–43. https://caod.oriprobe.com/article s/40403943/ji_gou_tou_zi_zhe_yang_qun_xing_wei_yu_gu_ jia_be ng.htm.
47. Yun Lee, K . (2020). Stock Price Crashes and Auditors’ Client-Retention Decisions. Journal of Accounting, Auditing & Finance. 1–25. https://doi.org/ 10.11 77 /0148558X20929485.