This document summarizes a presentation on how audit opinions are associated with information asymmetry in stock markets. It discusses how qualified audit opinions can reduce the credibility of financial statements and increase information risk for investors. The presentation outlines three hypotheses: 1) Firms with qualified audit opinions will have higher information asymmetry than those with unqualified opinions. 2) Firms with non-quantified audit qualifications will have higher information asymmetry than those with quantified qualifications. 3) Firms with non-quantified qualifications regarding going concerns will have higher information asymmetry than those with non-quantified qualifications regarding uncertainties and scope limitations. Regression models are used to test the relationships between various measures of information asymmetry and different types of audit opinions.

1. Audit opinion and information asymmetry
in the stock market
David Abad
(University of Alicante, Spain)
Juan Pedro Sánchez-Ballesta
(University of Murcia, Spain)
José Yagüe
(University of Murcia, Spain)
Presentation at Dpto. Economía y Dirección de Empresas
Universidad de Alcalá (UAH)
March 2015

2.  Motivation and objective
 Related literature
 Hypotheses
 Research design (model, proxies, and sample)
 Main Results
 Conclusions
Presentation

3.  The audit report exhibits the auditor’s opinion about the conforming of
firm’s financial statements to GAAP.
 With a qualified audit opinion auditors communicate their concerns and reservations
about the quality of the financial statements or their inability to gather sufficient information.
 A non-qualified report means that all accounting standards are properly observed by the
firm, thus enhancing the credibility of financial statements.
 High quality accounting information can be considered as a means of
reducing information asymmetry in capital markets .
 Since the accounting scandals of the early 2000s, researchers,
practitioners, and regulators have heightened attention to the accounting
disclosure quality and the role played by auditors.
 In this framework, an important issue is the effectiveness of auditors in
enhancing the credibility of financial reporting (Healy and Palepu,
2001). However, there is little evidence that examines whether auditors
increase the perceived credibility of financial statements.
Motivation and objective

4. Research question: Are audit qualifications and their types
associated with information asymmetry in the market?
 Since a qualified audit opinion rise concerns about the reliability of the
financial statements, we expect that those firms with qualified audit
reports will show higher information asymmetry than those with
unqualified opinions.
 Since audit opinions are not homogeneous (some provide clearer information
than others), we expect that the relation between audit opinions and
information asymmetry depends on the type of audit qualification.
 We also try to discern whether audit qualifications is the factor that drives
information asymmetry (create), or whether the association is caused by other
underlying economic or financial reporting of the firms (reveal information
asymmetry)
Motivation and objective

5.  Contribution:
 Up to our knowledge, this is the first paper that examines whether the
information contained in the audit opinion is associated with information
asymmetry in the stock market.
 This paper contributes to the literature focused on how disclosure and
earnings quality is related to the level of information asymmetry.
By using several microstructure measures of information (spread, price
impact measures, PIN), we find that firms with adverse audit opinions,
specially with un-quantified qualifications, show higher information
asymmetry in the market.
Motivation and objective
 Overview of results:

6.  Theoretically, a higher and better firm disclosure reduces information
asymmetry between traders in the stock market (Diamond, 1985; Merton, 1987;
Diamond and Verrechia, 1991; Easley and O’Hara, 2004) .
 The reduction of the advantage of informed traders reduces the risk of
adverse selection and improves the level of stock liquidity (Kyle, 1985, Glosten
and Milgrom, 1985).
 Empirical evidence shows:.
 Higher disclosure is negatively associated with bid-ask spread,
adverse selection spread components (Welker, 1995, Healy et al., 1999)
and PIN (Brown and Hillegeist, 2007).
 Lower reporting quality (proxied for accruals-based measures) leads to
lower liquidity and higher trading costs (Bhattacharya et al., 2013)
Related literature

7.  Financial information may reduce information risk in the market whether
investor perceive financial information to be credible (Hope et al., 2011).
 Auditors contribute to assess the reliability of financial information and the
audit opinion represents a crucial information for financial statement users
(Butler el al., 2004).
 However, there is little evidence on the relevance of the audit report in the
stock market:.
Related literature
- with audit compensation (Ascioglu et al., 2005; Danielsen et al., 2007)
- with audit quality, proxied by Big n, (Clinch et al., 2012).
 Prior research on association between information asymmetry and auditing:

8.  Stock-market reaction around announcement date:
 Significant negative price revisions to qualified audit reports (Dopuch et al.
1986, Chen et al. 2000, Soltani 2000)
 Qualified opinion do not provide new information to investors (Firth , 1978,
Dodd et al 1984, Pucheta et al, 2004)
 Reduction in the earnings response coefficient after qualified audit
opinions (Choi and Jeter, 1986))
 Long-run event study on going concern audit opinion (Taffler et al., 2004,
Ogneva and Subramayam, 2007)
 Studies about consequences of audit opinion in debt market:
 Qualified audit opinion associated with higher interest rates, lower loan
sizes, and a higher likelihood of collateral requirements (Chen et al 2012)
 Audit opinion do not affect credit availability from institutional lenders
(Nimei and Sundgren, 2012)
Related literature

9.  Through audit qualifications auditors signal that earnings numbers
generated by the firm are noisier or less credible than in unqualified
reports (Choi and Jen,1992).
H1: Firms with qualified audit reports will show higher
information asymmetry in the stock market than those with
unqualified opinions
 Since a qualified audit opinion manifests concerns on the reliability of
the firm’s financial information, it increases the uncertainty about the
precision of accounting numbers, and enhances the information risk in
the assessment of financial statements by market participants.
Hypotheses

10.  There are different types of audit qualifications (following Melumad and Ziv, 1997;
Pucheta et al 2004):
H2: Firms with non-quantified audit qualifications will show
higher information asymmetry in the stock market than those
with quantified qualifications
 and those that cannot be quantified (uncertainties, scope limitations, and
going-concern).
 those that quantify their repercussions on financial statements (e.g.
qualifications for asset realization, timing of revenue recognition, and
GAAP compliance)
We expect that those qualifications that involve higher uncertainty will be
associated to higher adverse selection than those that can be interpreted
more clearly.
Hypotheses

11.  Focusing on non-quantified qualifications:
 Going-concern: disclosed by auditors with substantial doubts
about the ability of the firm to continue to exist.
 Uncertainties and scope limitations: released when the auditor
shows his/her disagreement to specific aspects of the financial
statements but it is not possible to quantify their effects or they
cannot be deeply examined because of different problems to
develop the auditing task.
H3: Firms with non-quantified qualifications regarding going
concerns will show higher information asymmetry in the
stock market than those with non-quantified qualifications
regarding uncertainties and scope limitations
Hypotheses

12.  Model specification.
ASY: proxy for information asymmetry
Control variables:
Size: logarithm of total assets
Turnover: logarithm of trading volume scaled by firm size
Volat: stock return volatility as the daily squared close-to-open mid-quote return.
BigN: proxy for audit quality. 1 the firm is audited by a Big n Auditor, 0 otherwise
Z-score: proxy for firm’s financial situation. Altman Z-score by Begley et al. (1996)
Year and industry dummies variables to control temporal and industrial effects
QAO: type of audit opinion
For H1: - Qualified audit opinion: 1 qualified opinion, 0 unqualified opinion
For H2:
For H3: - Gconcern, 1 going concern audit opinion, 0 unqualified opinion
- Uncertainties, 1 uncertainties and scope limitations, 0 unqualified opinion
- Quantified, 1 quantified audit opinion, 0 unqualified opinion
- Non-quantified, 1 non-quantified audit opinions, 0 unqualified opinion
ti
j
j
t
t
i,ti,ti,ti,ti,ti,ti,t
IndβYearβ
ZscoreβBigNβVolatβTurnoverβSizeβQAOββASY
,
615432110




Research design

13.  Information asymmetry proxies.
- Price impact, PI, (Huang and Stoll, 1996):     t t t tPI Q Q X
- PIN (Easley et al., 1999): Information asymmetry proxies based on order imbalances.
- Relative effective bid-ask spread:
t
tt
t
Q
Qp
RES


*2
- ASY: index of information asymmetry as the first principal component of the RES, PI,
and PIN
sb
PIN




itititit PINPIRESASY 320.0396.0405.0 
Research design

14.  Endogeneity analysis: Two-stage probit approach.
- First stage, probability of receiving an audit qualification
  
t
i,t
j
jti,ti,ti,ti,ti,ti,t εIndβYearβASYβDiscAccβZscoreβBigNβSizeββQAOP 543210)(
where DiscAcc: absolute value of discretionary accruals estimated by the Jones (1991)
model modified by Dechow et al. (1995)
- Second stage:
 
 
t
i,t
j
jt
i,ti,ti,ti,ti,ti,ti,t
εIndβYearβ
ZscoreβBigNβVolatβTurnoverβSizeβQAOEstββASY 6154321(10 )
where Est(QAO): fitted probability of receiving an audit qualification
Research design

15.  Data: o Trade and quote data: Sociedad de Bolsas (BME)
o Audit opinions: Spanish Securities Market Comission (CNMV)
o Firm’s financial statements: SABI database
 Sample: 103 non-financial firms listed on the main segment of the SIBE in the
period 2001-2008. 562 firm-year observations.
Panel A: Continuous variables
Variable N Mean Std. Dev. Perc10 Median Perc90
RES 562 0.0066 0.0063 0.0013 0.0044 0.0152
PI 562 0.0038 0.0028 0.0011 0.0030 0.0076
PIN 561 0.1894 0.0617 0.1225 0.1797 0.2647
ASY 561 0.0000 1.0000 -1.0519 -0.2578 1.4942
Size 562 14.2206 1.7216 12.0982 14.1309 16.6347
Turnover 562 -6.2655 1.0508 -7.5443 -6.2707 -5.1237
Volat 562 0.0366 0.0514 0.0094 0.0233 0.0766
Z-score 562 0.4968 0.5420 0.2142 0.4232 0.8130
Panel B: Dummy variables
N 0 1
QAO 562 491 (87.37%) 71 (12.63%)
Big-N 562 33 (5.87%) 529 (94.13%)
Qualified
opinions N Quantified Non- Quantified
Uncertainties Gconcern
71 19 (26.76%) 33 (46.48%) 19 (26.76%)
Research design

16. Panel C: Number of firms and firm-years observations with qualifications
Number of firms
Number of
qualifications in the
sample period QAO Quantified Non-Quantified Gconcern Uncertainties
1 19 10 13 8 7
2 7 1 7 1 7
3 3 1 0 0 0
4 2 1 1 1 1
5 0 0 0 1 0
6 1 0 1 0 0
7 1 0 1 0 0
8 1 0 1 0 1
Total firms with
qualifications 34 13 24 11 16
Total firm-years
qualifications 71 19 52 19 33
Average qualifications
in the period for firm 2.09 1.46 2.17 1.73 2.06
Panel D. Descriptive statistics of Quantified Opinions
Variable N Mean Std. Dev. Perc10 Median Perc90
Quantification 19 -0.0681 0.1004 -0.1632 -0.0275 0.0056
>0 3 0.0071 0.0068 0.0012 0.0056 0.0145
<0 16 -0.0822 0.1037 -0.2380 -0.0525 -0.0027
Abs_Quantification 19 0.0704 0.0988 0.0025 0.0275 0.1632
Panel E. Audit opinion by type of auditor
Big-N
0 1
QAO
0 29 (87.88%) 462 (87.33%)
1 4 (12.12%) 67 (12.67%)
Quantified
0 29 (93.55%) 462 (96.45%)
1 2 (6.45%) 17 (3.55%)
Non-Quantified
0 29 (93.55%) 462 (90.23%)
1 2 (6.45%) 50 (9.77%)
Gconcern
0 29 (96.67%) 462 (96.25%)
1 1 (3.33%) 18 (3.75%)
Uncertainties
0 29 (96.67%) 462 (93.52%)
1 1 (3.33%) 32 (6.48%)
Research design

17. TABLE 3
Univariate analysis of relationship between audit opinion and audit quality with information
asymmetry
Panel A. Difference of means by Audit opinion
QAO N Mean Std.dev. t z M-W
RES
0 391 0.0058 0.0060
-3.417*** -3.854***
1 52 0.0098 0.0081
PI
0 391 0.0034 0.0027
-3.444*** -3.858***
1 52 0.0052 0.0036
PIN
0 390 0.1864 0.0628
-1.460 -2.300**
1 52 0.1996 0.0512
ASY
0 390 -0.1219 0.9739
-3.906*** -3.860***
1 52 0.4506 1.1262
Panel B. Differences of means by audit quality
Big-N N Mean Std.dev. t z M-W
RES
0 27 0.0097 0.0056
2.829*** 4.368***
1 416 0.0061 0.0064
PI
0 27 0.0049 0.0021
2.500** 3.943***
1 416 0.0035 0.0029
PIN
0 27 0.2016 0.0313
2.157** 2.187**
1 415 0.1870 0.0631
ASY 0 27 0.4156 0.6271 3.831*** 3.843***
Results

18. TABLE 4
Regressions of proxies for information asymmetry on Audit opinion
RES PI PIN ASY
QAO 0.0024** 0.0010** 0.0064 0.3133**
(2.21) (2.18) (0.89) (2.34)
Size -0.0022*** -0.0010*** -0.0166*** -0.3651***
(-6.08) (-7.60) (-8.26) (-8.17)
Turnover -0.0017*** -0.0004* -0.0279*** -0.3171***
(-2.66) (-1.98) (-6.77) (-3.64)
Volat 0.0253*** 0.0140*** 0.0783 4.010***
(3.82) (3.67) (1.28) (3.32)
Big-N -0.0023* -0.0007* -0.0003 -0.2525*
(-1.77) (-1.70) (-0.03) (-1.66)
Z-score -0.0014** -0.0006** -0.0046** -0.1949**
(-2.20) (-2.31) (-2.11) (-2.49)
Intercept 0.0334*** 0.0175*** 0.2423*** 3.9277***
(3.61) (5.10) (5.17) (3.46)
Year dummies Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes
R2
0.5994 0.6301 0.5759 0.6846
# obs 443 443 442 442
QAO: 1 qualified opinion, 0 unqualified opinion
H1: Firms with qualified audit reports will show higher information asymmetry in the
stock market than those with unqualified opinions
  
t
i,t
j
jti,ti,ti,ti,ti,ti,ti,t εIndβYearβscoreZβBigNβVolatβTurnoverβSizeβQAOββASY 615432110
Results

19. TABLE 5
Regressions of Information asymmetry index on different types of qualified audit opinions
(1) (2) (3) (4)
Quantified 0.1213
(0.54)
Non-Quantified 0.4405***
(2.88)
Gconcern 1.020***
(2.84)
Uncertainties 0.2787**
(2.04)
Size -0.3508*** -0.3502*** -0.3472*** -0.3359***
(-7.25) (-8.03) (-7.16) (-7.64)
Turnover -0.3333*** -0.3318*** -0.3395*** -0.3565***
(-3.62) (-3.75) (-3.63) (-3.98)
Volat 4.2078*** 3.8524*** 3.6650*** 3.9352***
(3.22) (3.40) (3.40) (3.43)
Big-N -0.2868* -0.2818* -0.2964* -0.3129*
(-1.78) (-1.66) (-1.66) (-1.79)
Z-score -0.1573** -0.1928** -0.1806** -0.1542**
(-2.30) (-2.51) (-2.55) (-2.40)
Intercept 3.071** 3.0524*** 2.9892** 2.6753**
(2.60) (2.71) (2.47) (2.35)
Year dummies Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes
R2
0.6708 0.6909 0.6824 0.6939
# obs 408 424 398 416
Quantified, 1 quantified audit opinion,
0 unqualified opinion
Non-quantified, 1 non-quantified audit opinion,
0 unqualified opinion
H2: Firms with non-quantified audit qualifications will show higher information asymmetry
in the stock market than those with quantified qualifications
  
t
i,t
j
jti,ti,ti,ti,ti,ti,ti,t εIndβYearβscoreZβBigNβVolatβTurnoverβSizeβQAOββASY 615432110
Results

20. TABLE 5
Regressions of Information asymmetry index on different types of qualified audit opinions
(1) (2) (3) (4)
Quantified 0.1213
(0.54)
Non-Quantified 0.4405***
(2.88)
Gconcern 1.020***
(2.84)
Uncertainties 0.2787**
(2.04)
Size -0.3508*** -0.3502*** -0.3472*** -0.3359***
(-7.25) (-8.03) (-7.16) (-7.64)
Turnover -0.3333*** -0.3318*** -0.3395*** -0.3565***
(-3.62) (-3.75) (-3.63) (-3.98)
Volat 4.2078*** 3.8524*** 3.6650*** 3.9352***
(3.22) (3.40) (3.40) (3.43)
Big-N -0.2868* -0.2818* -0.2964* -0.3129*
(-1.78) (-1.66) (-1.66) (-1.79)
Z-score -0.1573** -0.1928** -0.1806** -0.1542**
(-2.30) (-2.51) (-2.55) (-2.40)
Intercept 3.071** 3.0524*** 2.9892** 2.6753**
(2.60) (2.71) (2.47) (2.35)
Year dummies Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes
R2
0.6708 0.6909 0.6824 0.6939
# obs 408 424 398 416
Results
  
t
i,t
j
jti,ti,ti,ti,ti,ti,ti,t εIndβYearβscoreZβBigNβVolatβTurnoverβSizeβQAOββASY 615432110
H3: Firms with non-quantified qualifications regarding going concerns will show
higher information asymmetry in the stock market than those with non-quantified
qualifications regarding uncertainties and scope limitations
Uncertainties, 1 uncertainties & scope limitations,
0 unqualified opinion
Go-concern, 1 going-concern opinion,
0 unqualified opinion

21.  Robustness checks: for Big-N auditors
TABLE 6
Regressions of Information asymmetry index on different types of qualified audit
opinions for Big-N auditors
(1) (2) (3) (4) (5)
QAO 0.3134**
(2.24)
Quantified 0.0452
(0.27)
Non-Quantified 0.4604***
(2.75)
Gconcern 1.038***
(2.80)
Uncertainties 0.2766*
(1.85)
Size -0.3628*** -0.3453*** -0.3509*** -0.3492*** -0.3370***
(-7.98) (-7.03) (-7.89) (-7.01) (-7.43)
Turnover -0.3356*** -0.3568*** -0.3434*** -0.3534*** -0.3716***
(-3.60) (-3.62) (-3.64) (-3.54) (-3.86)
Volat 3.9141*** 4.039*** 3.7661*** 3.5623*** 3.8229***
(3.38) (3.38) (3.47) (3.48) (3.55)
Z-score -0.1919** -0.1525** -0.1885** -0.1755** -0.1494**
(-2.45) (-2.24) (-2.46) (-2.50) (-2.34)
Intercept 3.5178*** 3.0112** 3.2624*** 3.1928** 2.0835*
(3.05) (2.43) (2.81) (2.55) (1.81)
Year dummies Yes Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes Yes
R2
0.6927 0.6810 0.6969 0.6884 0.7006
# obs 414 383 399 376 391
  
t
i,t
j
jti,ti,ti,ti,ti,ti,t εIndβYearβscoreZβVolatβTurnoverβSizeβQAOββASY 5432110
Results

22.  Endogeneity analysis :
Results
TABLE 7
First stage Probit Regressions of Audit opinion on Information Asymmetry and
second stage regressions of Information asymmetry on Audit Opinion.
QAO QAO ASY ASY
Est(QAO) 1.6271*** 1.6343***
(4.78) (4.90)
Size -0.2132** -0.2248** -0.3197*** -0.3145***
(-2.12) (-2.20) (-6.35) (-6.20)
Turnover -0.3389*** -0.3592***
(-4.25) (-4.21)
Volat 3.8312*** 3.7250***
(3.59) (3.67)
Big-N 0.4121 -0.2549*
(0.96) (-1.85)
Z-score -2.0408*** -2.0060*** -0.2381** -0.2356**
(-3.10) (-2.98) (-2.23) (-2.12)
DiscAcc 2.5894** 2.4013**
(2.55) (2.26)
ASY 0.1834 0.1643
(1.14) (1.00)
Intercept 2.9278* 3.5476** 3.0698** 1.9065***
(1.80) (2.11) (2.49) (1.62)
Year dummies Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes
R2
0.2391 0.2410 0.7083 0.7158
# obs 556 523 439 411
  
t
i,t
j
jti,ti,ti,ti,ti,ti,ti,t εIndβYearβscoreZβBigNβVolatβTurnoverβSizeβQAOEstββASY 6154321(10 )
  
t
i,t
j
jti,ti,ti,ti,ti,ti,t εIndβYearβASYβDiscAccβscoreZβBigNβSizeββQAOP 543210)(

23.  Robustness checks: for earnings quality
Results
TABLE 8
Regressions of Information asymmetry index on different types of qualified audit opinions
controlling for discretionary accruals
(1) (2) (3) (4) (5)
QAO 0.2878**
(2.18)
Quantified 0.1021
(0.47)
Non-Quantified 0.4118***
(2.71)
Gconcern 0.9338**
(2.55)
Uncertainties 0.2667*
(1.92)
Size -0.3757*** -0.3611*** -0.3610*** -0.3579*** -0.3457***
(-8.12) (-7.23) (-7.92) (-7.06) (-7.50)
Turnover -0.3244*** -0.3376*** -0.3397*** -0.3452*** -0.3610***
(-3.79) (-3.74) (-3.90) (-3.74) (-4.09)
Volat 3.7883*** 4.0728*** 3.6370*** 3.4969*** 3.8029***
(3.30) (3.24) (3.38) (3.37) (3.45)
Big-N -0.2305 -0.2676 -0.2561 -0.2691 -0.2942
(-1.50) (-1.65) (-1.48) (-1.47) (-1.66)
Z-score -0.3655** -0.3105** -0.3618** -0.3377** -0.2944**
(-2.46) (-2.20) (-2.46) (-2.36) (-2.20)
DiscAcc -0.4445 -0.4924 -0.3267 -0.2838 -0.4129
(-0.84) (-0.90) (-0.60) (-0.50) (-0.76)
Intercept 4.1857*** 3.1961** 3.2625*** 3.7985** 2.8843**
(3.54) (2.66) (2.78) (2.90) (2.42)
Year dummies Yes Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes Yes
R2
0.6903 0.6760 0.6962 0.6872 0.6978
# obs 438 404 420 394 412
  
t
i,t
j
jti,ti,ti,ti,ti,ti,ti,t εIndβYearβscoreZβBigNβVolatβTurnoverβSizeβQAOββASY 615432110

24.  We find that firms with audit qualifications show higher information
asymmetry than those with unqualified opinions.
 We conclude that higher information asymmetry in qualified opinions is due
to those qualifications that include non-quantified qualifications such as
uncertainties, scope limitations and going-concerns.
 Within non-quantified qualifications, we find a stronger effect on information
asymmetry level in the case of going-concern qualifications.
 Our findings suggest that audit qualifications, specially non-quantified
opinions, are a signal of low accounting quality, thus they reduce the
credibility of firm’s financial reporting, and, as a consequence, are
associated with higher levels of information asymmetry.
Conclusions
 Results are robust to controlling for the firm’s financial situation, earnings
quality, and endogeneity between audit qualification and information
asymmetry.

25.  Contribution:
 Our findings contribute to research on the economic
consequences of audit opinion and reinforce the role played by
the audit report in assessing the reliability of financial reporting.
Conclusions
 Our results add new evidence to the literature on the effects of
accounting quality on information asymmetry.
 Limitations and future lines:
 The results may be specific to the Spanish context and its
institutional features (litigation risk, enforcement, and financial
reporting quality).
 Analysis of association between audit opinion and cost of capital.