Board Independence, Audit Opinion, and Market Reactions to Earnings Announcements

• In Event: Audit Firm and Opinions

Abstract

Focusing on the monitoring role of independent outside directors in firm's financial reporting, this paper proposes to investigate (1) the relation between the board independence and the likelihood of a firm's receiving qualified audit opinion and (2) the association between the board independence and market's response to unexpected earnings.
Present research proposes to test two hypotheses: that firms with greater fraction of board members who are independent outsiders are less likely to receive the qualified audit opinions (Audit Opinion Hypothesis) and that firms with greater faction of board members who are independent outsiders exhibit greater market reactions to unexpected earnings (Market Response Hypothesis).
The hypotheses will be tested using data from a sample of qualified firms for the period of 2001-2016 and a matched sample of unqualified firms matched by the industry membership and the size of firms.
The empirical test for the Audit Opinion Hypothesis is operationalized as a test of the coefficient of board independence variable in a probit model. On the other hand, the empirical test for the Market Response Hypothesis is operationalized as a test for a difference in the ERC between high independence board firms and low independence board firms in a regression of cumulative abnormal stock returns on unexpected earnings and control variables for other determinants of the ERC.

Author

• Young Park, University of the District of Columbia