THE EFFECT OF AUDITOR CHOICE ON THE EARNINGS-TO -RETURNS RELATIONSHIP: THE CASE OF MALAYSIA
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The literature on the relation ·hip between share price and earning · offirms has que tioned whether the nature ofadju ·tment ofprices to earnings information is homogeneous. This paper attempts to addre the issue of choice of auditor · by Malaysian listed firms and its effects on the credibility of the earnings generated, by analyzing the impact ofthe witch on the Earnings Response Coefficients (ERCs). The widely accepted perception that auditor quality is correlated with auditor size is not supportedfor the long window test in this study. However, in the short window test, the investors view the earnings generated by Ii tedfirms engaging the service · of non-Big 5 uudit firms as underestimated. The investors reward higher abnormal returns for the unexpected earnings disclosed around the earnings announcement dates for non-Big 5 clients than Big 5 clients. Finally, the finding · of this study not only sub tantiate the findings on similar research from developed markets but al o document the extension ofthefindings in the context ofan emerging market.
Abstract
The literature on the relation ·hip between share price and earning · offirms has que tioned whether the nature ofadju ·tment ofprices to earnings information is homogeneous. This paper attempts to addre the issue of choice of auditor · by Malaysian listed firms and its effects on the credibility of the earnings generated, by analyzing the impact ofthe witch on the Earnings Response Coefficients (ERCs). The widely accepted perception that auditor quality is correlated with auditor size is not supportedfor the long window test in this study. However, in the short window test, the investors view the earnings generated by Ii tedfirms engaging the service · of non-Big 5 uudit firms as underestimated. The investors reward higher abnormal returns for the unexpected earnings disclosed around the earnings announcement dates for non-Big 5 clients than Big 5 clients. Finally, the finding · of this study not only sub tantiate the findings on similar research from developed markets but al o document the extension ofthefindings in the context ofan emerging market.