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    Capital Market Consequences of Audit Partner Quality.
    research summary posted January 19, 2016 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 15.0 International Matters, 15.01 Audit Partner Identification by Name 
    Capital Market Consequences of Audit Partner Quality.
    Practical Implications:

    The study responds to the call for more academic research on the individuals that perform audits by examining a jurisdiction where audit partner identification is mandatory. Using the Taiwan market, the results show that engagement partner identification provides informational value to capital market participants. From a regulatory perspective, regulators believe that providing information that allows for investor evaluation of the audit partner’s past engagement performance is helpful for investment decision-making. This study provides support for the regulators’ views.


    Aobdia, D., C. Lin, and R. Petacchi. 2015. Capital Market Consequences of Audit Partner Quality. The Accounting Review 90 (6): 21432176.

    individual auditors, audit quality, capital market consequences
    Purpose of the Study:

    This study examines whether disclosing audit partner names provides information to the capital markets incremental to the disclosure of audit firms. Prior audit literature has shown that the hiring of a high quality audit firm is a positive signal to investors about firm value. However, there is limited empirical evidence on the individuals performing the audit. The purpose of this study is to address this knowledge gap by assessing the informational value of audit partners in the capital markets. To assess informational value, the authors first determine the audit partner’s quality based on their client’s discretionary accruals. Using the assessed quality level, the authors evaluate the following questions:

    • Do capital markets respond positively to a switch from a low quality audit partner to a high quality audit partner?
    • Are earnings more informative when audited by a high quality audit partner?
    • Do firms audited by high quality audit partners have lower IPO underpricing and obtain better debt contracts?

    This study is the first large-sample study to address whether audit partners provide information to investors above their audit firm affiliation. This is of high importance because of recent regulatory proposals in the European Union and United States that call for audit partner disclosure. The results from this study provide an understanding of the consequences of audit partner quality and show how investors value differences in audit partner quality. In addition, the study also expands the audit quality literature by providing evidence at a level below the audit firm.  

    Design/Method/ Approach:

    The authors employ an archival research methodology in this study. They obtain financial and audit-related data from the Taiwan Economic Journal (TEJ) for all public companies in Taiwan. The authors obtain audit partner changes, names of current and former partners, and other financial-related announcements from the Market Observation Post System (MOPS). The sample period is from 1995-2010. For the audit partner quality tests, the data is from the 1995-2005 period. For the capital market tests, the data is from the 2006-2010 period.

    • Audit partner quality is positively associated with earnings response coefficients indicating that investors perceive earnings as more informative when audited by a high quality audit partner.
    • In addition, capital markets react positively to a switch from a low quality engagement partner to a high quality engagement partner. A change to an audit partner with quality one quartile higher is associated with a positive abnormal returns of 0.7  1.2%.
    • Using the IPO setting, the authors find that firms going public experience lower IPO underpricing when audited by high quality audit partners.
    • In the debt setting, high quality audit partners contribute to reducing the information asymmetry between firms and their lenders. Firms audited by high quality engagement partners have debt contracts with lower interest rates, higher loan values, and fewer securitized collateral requirements.  
    Audit Quality & Quality Control, International Matters
    Audit Partner Identification by Name