Do Big 4 audit firms improve the value relevance of earnings and equity?
Abstract
Purpose
The purpose of this paper is to examine the association between audit quality and value relevance of representative accounting measures, such as earnings and book value of equity.
Design/methodology/approach
The authors estimate the standard value relevance equations and the modified equations by ordinary least square regressions and 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; and based on previous lines of published research.
Findings
Some evidence was found 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 the authors' prediction that audit quality, as captured by size of audit firms, improves the value relevance of earnings and book value of equity.
Keywords
Citation
Lee, H. and Lee, H. (2013), "Do Big 4 audit firms improve the value relevance of earnings and equity?", Managerial Auditing Journal, Vol. 28 No. 7, pp. 628-646. https://doi.org/10.1108/MAJ-07-2012-0728
Publisher
:Emerald Group Publishing Limited
Copyright © 2013, Emerald Group Publishing Limited