Impact of Audit Quality on Stock Price Crash Risk: Evidence from Pakistan Stock Exchange

Abstract

Stock price crash risk is an unfavourable event in business that may decrease the shareholder’s wealth and hurt stability and capital market growth. This study investigates the impact of audit quality measured by auditor industry specialization (AIS), audit tenure (AT), audit committee independence (ACI), audit firm size(AFS)) on stock value crash (measured by down-to-up unpredictability) for a sample of 70 non-financial firms listed in Pakistan Stock Exchange during from 2009 to 2018. Efficient governance enriches financial and operational directness, which cuts down the stock value crashes in rotation. Facing crash risk difficulties, traders impart more funds to stocks of well-regime organizations. The fixed effect model results show that AIS and ACI have a negative and significant impact on crash risk, while there is a positive impact of AFS on stock price crash risk. Moreover, it concludes that it has an insignificant impact on stock price crash risk in Pakistan. It is concluded that effective audit quality lessens the difficulty of data abnormality and improves stock price crash risk. This study has importance for investors to help them identify the most liquid stock and will enable them to decide which stocks to acquire and which to dispose of. This study will also be helpful for academics and scholars to bridge this gap on the influence of audit quality practices on the economic consequences of Pakistan. It will be useful for future research as well as because it will become part of the empirical literature on the economic consequence of stock markets.

The Impact of Firm Characteristics on Future Stock Price Crash Risk: Evidence from Egypt

“…These results mean that the larger (smaller) firms decrease (increase) the likelihood of FSPCR, and the higher (lower) ratio of ROA decrease (increase) the likelihood of FSPCR in the sample of the study, besides that firms that depend more heavily on debt financing are less prone to potential FSPCR. Additionally, there was a significant negative impact of SPEC on FSPCR measures which is consistent with the study of (Khajavi & Zare, 2016;Sultana et al, 2022). This result means that SPEC mitigates FSPCR because specialized audit firms have a large number of firms in a particular sector, which leads them to depend on their prior experience when auditing those firms rather than focusing on the special nature of each firm.…”

“…On the other hand, Abdel-Wanes (2021) indicated that audit quality has a significant positive impact on FSPCR through financial statement manipulation and non-disclosure, which occurs as a result of the auditor's tendency to increase his fees. In the same context, Sultana et al, (2022), reported that there was a significant positive impact of audit quality on FSPCR.…”

“…On the other hand, Abdel-Wanes (2021) found that improving audit quality increases FSPCR when using OLS, GLS, and GLM, but not when using GMM. Furthermore, Sultana et al (2022) have found that audit quality measured by (BIG4) has a significant positive impact on FSPCR. In the same context, Salehi et al (2022) have found that audit quality measured by (fees) has a significant positive impact on FSPCR.…”

“…Future Stock Price Crash risk (FSPCR) is an undesirable event in business as asymmetric differences in stock returns may reduce shareholder wealth and, as a result, have a negative impact on the stability, growth, and development of the capital market (Sultana et al, 2022). Despite the fact that FSPCR has been an ongoing issue for investors and the government ever since significant corporate frauds occurred in the early 2000s, they concentrated more on research into it following the 2008 financial crisis (Liao & Ouyang 2017;Chen et al, 2017a;Silva, 2019).…”

“…The vastness and broadness of corporate governance literature, over the last few decades, demonstrate the critical role that corporate governance systems play in preserving shareholders' interests (Andreou et al, 2016). Due to FSPCR issues, investors allocate more funds to stocks of well-regime firms (effective corporate governance) (Sultana et al, 2022). Studying FSPCR is especially crucial in developing countries since corporate governance attributes differ from nation to nation and between different firms due to various ownership structures and corporate governance -as a characteristic of the firm-Therefore, the study will assess the impact of board characteristics as an internal government mechanism and audit quality as an external government mechanism on the possibility of FSPCR in Egypt's non-financial sectors.…”