Auditor Designated Firms and Value Relevance of Accounting Information
Asian Tax Journal Vol. 15 No. 3 (2014), pp. 209-233
Abstract
Reliable accounting information is an important input in firm valuation. Reliability of accountinginformation is reasonably assured by firms’ external auditors. External auditors are hired in one ofthe two ways：the issuer’s discretionary selection and regulators’ designation. So it would beinteresting to investigate whether regulators’ auditor designation is a positive influence on firmvalue. We use, unlike prior research, value relevance to measure audit quality. Korea serves as aperfect setting for the research of this kind because in Korea the two auditor－hiring methods arein practice. The findings of this study have both academic and policy implications. First, our studyis another addition to the literature which supports regulators’roles in maintaining the quality ofexternal auditing. Second, we look at the issue of audit quality through the lens of valuerelevance, a departure from the research tradition in audit quality which focuses on discretionaryaccruals and other earnings management practices. Lastly, this study promotes both academic andpractical awareness of each different reason for auditor designation because each reason may havea different influence on value relevance, and ultimately, firm value.
Keywords
- Value relevance
- Auditor designation
- Accounting information
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