Audit Quality and Investment Efficiency with Informed Trading

Date
2018-08-29
Authors
Langberg, Nisan
Rothenberg, Naomi
Contributor
Advisor
Department
Instructor
Depositor
Speaker
Researcher
Consultant
Interviewer
Journal Title
Journal ISSN
Volume Title
Publisher
Volume
Number/Issue
Starting Page
Ending Page
Alternative Title
Abstract
We study how informed, strategic trading affects audit quality and investment efficiency. With the auditor's damage payment due to legal liability based on the decrease in the market price after an audit failure, we show that informed trading provides a hedge to the auditor against legal liability risk, and weakens incentives for audit quality. In turn, the strategic trader produces more information due to higher gains from trade that are made available by lower audit quality. Moreover, the behavior of liquidity traders affects both audit quality and the extent of informed trading, and is not monotonically related. A stricter legal liability regime leads to higher audit quality and less informed trading. However, prices can be used to guide real investments, such as corporate expansions and stricter liability might lead to lower investment efficiency because with less informed trading, market prices are less informative.
Description
Keywords
Auditor liability, Financial reporting quality, Informed trading, Information production, Real capital investment
Citation
Extent
Format
Geographic Location
Time Period
Related To
Rights
Rights Holder
Email libraryada-l@lists.hawaii.edu if you need this content in ADA-compliant format.