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Market Reactions to Qualified Audit Reports: Research Approaches

Purpose - The purpose of this paper is to review the archival literature on market reactions to qualified audit reports and to seek to identify the different approaches used in those studies. In addition, the paper discusses the strengths and weaknesses of different approaches, summarizes key findings, and provides suggestions for future research. Design/methodology/approach - The paper reviews articles examining the relevance of qualified audit reports published between 1972 and 2010. Findings - First, the review suggests that there are three main approaches used in the literature: the short-window approach, the long-window approach, and the indirect approach. Each approach has both strengths and significant weaknesses that should be acknowledged. Second, as a whole the empirical findings in this area are mixed. A more detailed analysis reveals that only the indirect approach has consistently found support for the relevance of qualified audit reports. Research limitations/implications - This paper shows that in future, researchers in this area should strive to identify the correct information release date, because it is the most critical step in conducting event studies. In addition to the event date identification, the effect of simultaneous information releases during the event period must be considered. Last, it is suggested that researchers include other stock market measures besides abnormal returns in their analysis, because measures like change in volatility, volume, bid-ask spread, and systematic risk could provide information that abnormal returns do not offer. Originality/value - This paper provides a review of the current state of knowledge on whether audit reports convey new information to the stock markets.