A Study On The Effect Of Auditor Reputation And Audit Opinion Upon Reducing The Information Asymmetry

In the capital market, the information is divided into public and private information according to the disclosure form of information; investors are divided into informed traders and uninformed traders according to the possession of private information or not. At this stage, China’s A-share market is still an imperfect and inefficient capital market. Insider trading is widespread which is caused by the possession of private information. Informed traders have private information can obtain excess returns,but at the expense of the interests of the non-informed traders. Informed trading behavior is caused by the information asymmetry in the transaction process.Information asymmetry led to some traders obntain unknown event information, and as a basis for the trading of securities. Quality assurance, brand and chain operations can reduce the information asymmetry in the transaction process.At the same time, the development of information intermediaries also help alleviate information asymmetry.Independent audit is important information intermediary in the securities market institutional settings, plays an important role for the mitigation of agency conflicts and reducing information asymmetry. The different reputation of auditors will lead to different quality of the information; the different types of audit opinions has different information content. Reputation is an extension of the brand; the different types of audit opinions is the different level of assurance of the quality of financial reporting. Thus, the independent audit innately can mitigate information asymmetry, and information asymmetry is the direct cause of audit. Existing literatures mainly focuse on the analysis of the relationship of the auditor’s reputation and the quality of information disclosure, information content and the information role of audit opinion, few literature focuses on the relationship of audit opinions, auditor reputation and information asymmetry directly. The reason is that the information asymmetry in the capital market can not be directly observed. Although some scholars have tried to measure information asymmetry from information asymmetry causes and the consequences of information asymmetry, but these indicators have obvious disadvantages. The integration of the development of the theory of market microstructure theory and corporate finance theory provides a new perspective and idea for the research of independent audit and information asymmetry.The theory of market microstructure has three methods to measure information asymmetry:First, the adverse selection component of trading spreads; Second, the effect of trading activities on price; Third,the probability of informed trading.And the probability of informed trading is considered to be the best indicators in empirical research to measure information asymmetry.In the research of corporate governance, most literature focuses on the asymmetric information between insiders and outsiders, ignoring the information asymmetry between informed traders and uninformed traders,but two types of information asymmetry can be transformed into each other. When insiders with private information into the stock market will be converted to informed traders.So the degree of information asymmetry between informed traders and uninformed traders can reflect the degree of information asymmetry between insiders and outsiders.This article uses the information asymmetry indicators in the market microstructure theory to measure the degree of information asymmetry,and tests the relationship of audit opinions, auditor reputation and information asymmetry directly. This paper is divided into six chapters, the contents of each chapter are as follows.Chapter1:Introduction. This chapter outlines research background, the significance of this study, research ideas, the innovation to be achieved, research methods and research framework.Chapter2:Literature Review. This chapter describes the existing literature about the measure of information asymmetry,the relation between auditor reputation and information asymmetry,the information content and the information role of audit opinion.Then making comments on shortcomings and deficiencies of the existing literature, pointing out the research direction.Chapter3:Theoretical analysis and hypothesis. This chapter analyzes the path and mechanism of the reputation of auditors and audit opinion reduce information asymmetry,and puts forward the hypothesis of this paper. According to the theoretical analysis, This article puts forward three hypothesis:(1) The higher the auditor’s reputation, the lower the degree of information asymmetry;(2) Audit opinion can reflect the degree of information asymmetry in the capital market, the current modified auditing opinions issued, the higher degree of information asymmetry this year;(3) modified auditing opinions issued in previous year, the higher degree of information asymmetry this year.Chapter4:The empirical research design. This chapter describes the definition and measurement of the main research variables and control variables, the research model and the research sample selection.Chapter5:Empirical results and analysis. This chapter begins with the descriptive statistical analysis of variables. Second, testing the effect of auditor reputation on information asymmetry; Third, testing the information content of the audit opinion;At last, testing the effect of audit opinion on information asymmetry.Chapter6:concluding section. This chapter summarizes the empirical results, makes recommendations for investors, listed companies,accounting firms and securities regulatory authorities,points out the limitations of this article and future research directions.Through empirical testing, the following conclusions:(1) Auditor reputation is negatively associated with the degree of information asymmetry. The empirical results show that auditor reputation can reduce the information asymmetry, as the high reputation of the "big four" and domestic "Big Six" can significantly reduce the information asymmetry. Auditor reputation mechanism plays a role in the transaction process.(2)Modified auditing opinions issued this year is positively associated with the degree of information asymmetry. In further analysis, modified auditing opinions is divided to a going-concern audit opinion and non-going-concern audit opinion. Going-concern audit opinion can better reflect the degree of information asymmetry.(3) Modified auditing opinions issued in previous year is positively associated with the degree of information asymmetry,but modified auditing opinions being given by "big four" is negatively associated with the degree of information asymmetry.In this paper, the innovation to be achieved that reflected in the following three aspects:First,reconciling the market microstructure theory and auditing theory. The market microstructure theory of financial markets and corporate finance science research gradually showing a trend of convergence,and increasingly favored by the corporate finance scholars.But there is no literature focus on corporate governance based on the information asymmetry of the market microstructure theory. This article uses the probability of informed trading directly measure the degree of information asymmetry,and focus on the relation between independent Audit and information asymmetry, reconciling the market microstructure theory and auditing theory.Second, the introduction of the probability of informed trading to research the information value of independent audit.The current research most focus on the relation between auditor’s reputation and the quality of information disclosure, the information content and the information role of audit opinions, few literature focuses on the relationship of audit opinions, auditor reputation and information asymmetry directly. The reason is that information asymmetry is difficult to measure.The probability of informed trading is considered to be the best indicators in empirical research,this paper directly research the relation between independent audit and information asymmetry on the basis of the probability of informed trading.Third, focusing on the effect of independent audit on the information asymmetry between investors.In previous research,most literatures focuses on the information asymmetry between insider and outsider, few literature focuses on the information asymmetry between investors.After the Share Segregation Reform, the information asymmetry between investors play an more important role in the capital market.In this paper, the probability of informed trading reflects the information asymmetry between investors,the research based on the probability of informed trading can research the relationship of independent audit and the information asymmetry between investors.