Auditor Quality and the Role of Accounting Information Flows in Explaining UK Stock Returns

Mark Anthony Clatworthy (), Christopher Pong and Woon K. Wong ()

No E2009/9, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

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 offers a more informative interpretation of the variance decomposition results. 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, expected return news and cash flow news seem more important in the UK than in the US.

New Economics Papers: this item is included in nep-acc
Date: 2009-08
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