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Auditor quality and the role of accounting information in explaining UK stock returns

Clatworthy, Mark, Pong, Christopher K.M. and Wong, Woon K. 2009. Auditor quality and the role of accounting information in explaining UK stock returns. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

Using a variance decomposition approach, we examine the importance of accounting information – in particular the cash flow and accruals components of earnings – in explaining the variation in UK company stock returns. We extend prior research by analysing whether auditor quality moderates the role of accruals and cash flows in driving returns on both a relative and an absolute basis. Moreover, we employ a new orthogonal variance decomposition which reduces the influence of the covariance terms on the variance decomposition results. In general, our results indicate that both components of earnings are important drivers of stock returns and suggest that the significance of both earnings components varies conditional on auditor quality. Although there are some similarities with US-based research, a number of differences are also evident. In particular, cash flow news seems more important in the UK than in the US.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Cardiff University
Date of First Compliant Deposit: 30 March 2016
Last Modified: 10 Oct 2017 16:35
URI: https://orca.cardiff.ac.uk/id/eprint/77820

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