The value relevance of summarized accounting information and audit quality

Abstract

This paper examines the association between audit quality and value relevance of representative accounting measures. We take into account the effect of a firm’s future profitability on its book value, when estimating the explanatory power of book value to stock return. The major results show that the earnings and book value of equity audited by big-five CPA firms explain more variations in stock return than those audited by non-big five CPA firms. Hence, both earnings and book value audited by big-five CPA firms are more relevant than those audited by non-big-five CPA firms. Assuming that the big-five CPA firms provide a higher level of assurance and audit quality, the overall results moderately support our prediction in that audit quality improves the value relevance of earnings and book value of equity.