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, R 2; 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.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 96 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.