THE EFFECT OF AUDITORS’ REPORT ON STOCK RETURNS: EVIDENCE FROM LISTED ENTITIES IN SRI LANKA

Abstract

Past literature shows inconsistent results when analyzing the impact on the external auditors’ report (AR) and stock returns. Similarly, it was observed that there is less literature that examined the significance of the relationship between each type of five main categories of AR on stock returns. The purpose of this paper is to examine the stock return’s reaction to different types of AR in Sri Lanka. The standard event study methodology, aiming on a short event window, was used to determine whether there is a significant reaction in stock returns to the announcement of audit report. The Average Abnormal Returns (AARs) and the Cumulative Average Abnormal Returns (CAARs) were analysed with t-test analyses to test the significance, for the five different categories of AR. The findings show that in the event study that AR with adverse opinion and disclaimer opinion have a significant positive impact on the stock returns where the positive direction is a novel finding which is a significant contribution to the literature. Nevertheless, there were no significant effects found from other opinions. Overall, this analysis concludes that the auditors’ report has a less informative value to investors in the Sri Lankan context. The findings of this paper show the value of information content of the auditors’ reports to investors, differentiating the various reactions based on each type of audit report issued.