How Do Nonprofessional Investors Respond to Disclosure of Audit Quality Indicators?

• In Event: Audit Quality

Abstract

Both U.S. and international standard setters have sponsored initiatives to develop a reliable portfolio of audit quality indicators (AQIs). The primary goal of these initiatives is to provide new insights into how to evaluate audit quality and, critically, how high-quality audits are achieved. In an experiment, we examine how nonprofessional investors, a primary beneficiary of the financial reporting process, respond to receiving auditor-disclosed AQIs. We manipulate both the trend of the AQI data disclosed (positive or negative) and whether the quantitative AQIs are accompanied by a qualitative contextual narrative from the auditors (present or absent). We also include a control group conforming to the current audit reporting environment that omits any AQI disclosure. We find that investors experience more positive feelings and affective reaction towards the auditors when they receive a positive-trending AQI portfolio compared to when a negative trend of AQIs is disclosed. In turn, investors receiving a positive-trending AQI portfolio are more likely to ratify the selection of their company’s auditor and voluntarily increase their equity investment in the company. Our results also indicate that a positive-trending AQI portfolio is more influential on investor decision-making when it is accompanied by a qualitative discussion providing additional context. Our findings should be of interest to regulators and standard setters as they consider how to advance the dialogue on AQIs and determine the proper communication medium to disseminate AQI data.

Authors

• Jeffrey Brown, Baylor University

• Velina Krastimirova Popova, Kennesaw State University