Audit Quality and Properties of Analysts' Information Environment

35 Pages Posted: 29 Jul 2014

See all articles by Wen He

Wen He

UNSW Business School

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting

Stephen L. Taylor

University of Technology Sydney (UTS) - School of Accounting; University of Technology Sydney; Centre for International Finance and Regulation (CIFR)

Date Written: July 29, 2014

Abstract

Prior research (Behn et al. 2008) suggests that higher audit quality is associated with increased accuracy and reduced dispersion in earnings forecasts issued by sell-side analysts. We extend this work to consider how audit quality impacts the information environment in which analysts operate. Using the method outlined by Barron et al. (1998), we examine whether higher audit quality (proxied as an industry specialist auditor) is associated with differences in the weight analysts place on common information relative to private information, as well as the extent to which audit quality separately impacts on the precision of analysts’ private and common information. Our results show that higher audit quality results in analysts placing increased weight on public information, but also that the precision of private (as well as public) information is improved. These results extend our understanding of how audit quality impacts on attributes of analysts’ forecasts and provides support for the argument that audit quality impacts users of audited financial reports.

Keywords: audit quality, earnings forecasts, information environment, analysts

JEL Classification: M41, G34

Suggested Citation

He, Wen and Sidhu, Baljit K. and Taylor, Stephen L., Audit Quality and Properties of Analysts' Information Environment (July 29, 2014). Available at SSRN: https://ssrn.com/abstract=2473418 or http://dx.doi.org/10.2139/ssrn.2473418

Wen He

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Stephen L. Taylor (Contact Author)

University of Technology Sydney (UTS) - School of Accounting

P.O. Box 123
Broadway NSW 2007
Australia
+612 9514 3437 (Phone)

University of Technology Sydney ( email )

UTS Business School
PO Box 123 Broadway
Sydney, NSW 2007
Australia
61295143437 (Phone)
61295143513 (Fax)

Centre for International Finance and Regulation (CIFR) ( email )

Level 7 UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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