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Auditor’s report, auditor’s size and report,Auditor’s

size and
value relevance of value relevance

accounting information
Ahmad Abdollahi
Department of Accounting, Allameh Tabatabai University, Tehran, Iran
Received 1 November 2019
Yasser Rezaei Pitenoei Revised 21 April 2020
Department of Accounting, Faculty of Humanities, University of Guilan, Accepted 24 May 2020

Rasht, Iran, and

Mehdi Safari Gerayli
Department of Accounting, Bandargaz Branch,
Islamic Azad University, Bandargaz, Iran

Abstract
Purpose – The present study sets out to examine the effect of auditor’s report and audit firm size on the value
relevance of accounting information of the companies listed on the Tehran Stock Exchange during the years
2008–2017.
Design/methodology/approach – The study includes a sample of 1,530 firm-year observations drawn from
the listed companies, and the research hypotheses were analyzed using multivariate regression model based on
panel data.
Findings – The findings reveal that auditor’s report and audit firm size are positively and significantly
correlated with two indicators of the value relevance of accounting information including value relevance of
earnings and book value per share. Also our results exhibit robustness to the alternative measure of auditor’s
attributes.
Research limitations/implications – As far as we know, this is the first study to analyze the association
between auditor’s attributes and value relevance of accounting information in emerging capital markets,
thereby generating certain implications for investors, managers, capital market policy makers and audit
profession regulators in general and those in emerging markets in particular.
Practical implications – Our findings have implications for policy makers, regulators, managers and
investors. Our evidence on the positive association between auditor’s size and value relevance of accounting
information should help policy makers and regulators which they improve value relevance of accounting
information and financial reporting by integrating small audit firms and setting up larger audit firms.
Originality/value – A rise in the value relevance of accounting information deserves further attention while
drawing investment, selling the stocks of existing firms and increasing investor’s decision-making ability. The
way how auditor’s attributes can promote the value relevance of accounting information is still open to new
research.
Keywords Audit report, Audit firm, Value relevance of accounting information, Earnings value per share,
Book value per share
Paper type Research paper

1. Introduction
The main objective of reporting is to provide useful corporate information and support
financial statement users in their decision-making process (International Accounting
Standards Board, 2013). Financial information is defined to offer a true and fair picture of
firms’ financial position and performance, together with alterations in their equity ownership
and cash flows. The thorough information given the financial position and performance
ensures the uniform and total conveyance of what financial reports contain to all users Journal of Applied Accounting
Research
(Philips, 1988). The imperfect information, however, lays the foundation for the manifestation © Emerald Publishing Limited
0967-5426
of information asymmetry. Taking the level of the reporting system into account, the DOI 10.1108/JAAR-11-2019-0153
JAAR reduction of financial asymmetry seems impossible unless a third part is introduced in the
system (a financial auditor) to ensure the accuracy and the precision of the conveyed
information. The issuance of a proficient, objective and independent opinion regarding the
accuracy of the reported information on the financial position and performance of the
company is expected to be performed by this third person (the auditor) who must be
recognized and agreed by all users (Hakim and Omri, 2010; Hope et al., 2012). The audit
opinion is transmitted via the audit report, through which the communication process is
between the company, represented by its manager and the users of the financial information
(Ittonen, 2012), which brings value added in the decision-making process of the investors, is
implemented. The major financial scandals in the recent years and mainly the errors reported
in financial statements zero in on the paramount importance of financial auditors in
guaranteeing the quality of the information transmitted on the financial markets (Hakim and
Omri, 2010).
Generally speaking, value relevance of accounting information can also serve as a tool
for shaping the future of accounting/reporting information (Maigoshi et al., 2018). One of
the aims of financial reporting is to provide investors and creditors with reliable
information to allow them to make informed decisions. Therefore, relevant and reliable
information that influences individuals’ economic decisions and results in logical decisions
is of paramount importance. Information asymmetry creates great incentives for investors
to demand audit report. Auditors prepare independent, professional and purposeful audit
reports with special emphasis on issuing accurate financial statements and offering true
views of the most significant aspects of financial position and performance based on given
accounting standards, which exert a significant impact on stock return. In an efficient
financial market, rational investors are persistently looking for those financial positions
which can offer indications regarding the acquisition of higher return with minimum risk.
Investors may confront with various risks, among which their conflict of interest with
managers, arisen as a result of information mismatch, and financial distortions are the
most risky ones. Reduced informational differences among financial statement users,
particularly their providers and the investors require the financial statements to be carried
out by professional, objective and independent persons. Audit services are accomplished
by audit reports, determined to support the decisions made by real and possible investors
(Arens et al., 2012). Audit reports must be understandable, objective and palatable to users
as a relevant information source and means of communication between the auditor and
their users.
The relevance of the accounting information is one of the most important issues for
investors and other stakeholders who seek to invest in other companies. Value relevance of
accounting information has come to academicians’ attention so that several studies are
carried out in both privileged and underprivileged countries. Prior research suggests that
factors such as earnings management (Habib, 2004), free cash flow (Fuad Rahman and Mohd-
Saleh, 2008), financial disclosure (Shamki and Abdul Rahman, 2013), integrated reporting
(Tlili et al., 2019), IFRS adoption (Isaboke and Chen, 2019) and corporate governance
(Jamaluddin et al., 2009; Tshipa et al., 2018) explain the variation in value relevance of
accounting information. In addition, audit quality and the usefulness of accounting
information are important issues in the capital market. Owing to the influence of audit quality
and value relevance of accounting information on investors’ decisions and their
interrelationships (Robu and Robu, 2015), analyzing the consequences of audit quality on
the value relevance of accounting information is of interest to managers, financial analysts,
investors and shareholders. The analysis of the effect of audit quality on the value relevance
of accounting information is implemented through stimuli and qualitative factors hidden in
the audit (Boone et al., 2010; Ittonen, 2012). Given the communication between auditing and its
users, previous theoretical and empirical research in auditing shows that the type of auditing
reports and auditor size are more understandable stimuli for auditing users such that they are Auditor’s
accepted by users as more relevant sources of information and influence their decisions in the report, size and
capital market (Robu and Robu, 2015).
However, the extent to which auditor’s attributes including audit report and audit firm
value relevance
size are associated with value relevance of accounting information has remained unexplored
in such emerging countries as Iran. Iran is known as one of the emerging markets, in which
government still plays a decisive role in its economy. Moreover, in Iran, state and
institutional-controlled firms account for the majority of listed firms. Furthermore, the capital
market in Iran is very new and somewhat inefficient. In addition, the Iranian audit market is
distinguished from its counterpart in other countries in a number of characteristics, among
which liberalization gives it a discrete identity. Prior to that, the Iranian Auditing
Organization (IAO), as a government entity, had dominance over the Iranian audit market.
After the liberalization of the audit market (the law that permits the provision of auditing
services by private audit firms) in 2001, however, the competition between auditors increased
rapidly and resulted in the establishment of numerous private audit firms. Second, the Iranian
audit market lacks any international audit firms, providing a competitive environment only
between private audit firms. The effect of competition pressure on audit fees is thus more
pronounced in such an environment. Finally, the civil litigation risk for auditors in the Iranian
audit market is very low. Therefore, we would argue that these unique socio-economic
characteristics, special audit market and other external and political factors such as trade and
economic sanctions against Iran make this country a good sample for our study.
This study contributes to the literature on both the auditor’s attributes and value
relevance of accounting information. Previous studies document a range of determinants of
the value relevance of accounting information, including earnings management, free cash
flow, financial disclosure, integrated reporting and corporate governance (Habib, 2004; Fuad
Rahman and Mohd-Saleh, 2008; Jamaluddin et al., 2009; Tshipa et al., 2018; Tlili et al., 2019).
Our study fills this gap in the literature by underscoring the pivotal role auditor’s attributes
play in determining the value relevance of accounting information. We also contribute to the
value relevance literature by showing that auditor’s attributes, a hitherto unexplored
determinant, explain differences in value relevance of accounting information. This paper is
organized as follows. In the next section, we provide background information on the
institutional environment in Iran. In Section 3, we develop our hypotheses. Section 4 describes
the data selection procedure and research method. Section 5 illustrates the empirical results
and finally the last section provides concluding remarks.

2. Institutional environment in Iran

Despite being a developing country, Iran is recognized for its rich resources of oil, gas and
other natural reserves. Establishing a well-organized stock market and fostering the process
of industrialization in Iran date back to the 1930s when the Iranian National Bank undertook
a study on the subject. The outbreak of World War II and its adverse economic and political
effects slowed the pace of establishing the stock exchange until 1967, when the Stock
Exchange Act was passed. Opened in April 1968, the Tehran Stock Exchange (TSE) was
initially a market where only government bonds and certain state-backed certificates were
traded. As one of the largest capital markets in the Middle East region, this market witnesses
a good relationship between banks and companies as banks are mostly state-owned, with
non-state-owned firms being under the strict control and regulations of the government. The
government or semi-governmental units are themselves recognized as one of the big
stockholders at TSE. It is noteworthy that Iran lacks an organized system for corporations to
issue bonds for public investors. Simultaneously, institutional changes like the transmission
of shares owned by publicly traded companies and large monopolies to employees and the
JAAR private sector underlay the expansion of stock market activities (Mashayekhi and
Mashayekh, 2008). Except some negligible changes in the accounting institutions, the
structure of the Iranian capital market does not undergo any material changes. The
institutional environment for Iranian firms and this country has several salient features that
distinguish Iranian firms from those in other countries:
(1) State-owned companies and the state now own more than half of the publicly held
stocks on TSE.
(2) The economy of Iran is under severe economic and trade sanctions.

The regulations of the TSE require public firms to audit their financial statements by
Official Accountants. Therefore, all the Big Eight international accounting firms in Iran had
Official Accountants in their employ. In the 1960s and 1970s, the public accounting profession
in Iran was dominated by the Big Eight. While there was an emerging cadre of local and
Western trained Iranian accountants, the Big Eight tended to be dominated by expatriates
from the United Kingdom, United States, and South Africa. This contributed to accounting
and auditing in Iran being affected by foreign practices. Nevertheless, these developments
were ad hoc and there was no systematic structure in place either for setting national
accounting standards or for adopting International Accounting Standards.
Accompanying the nationalization of companies after 1979, audit functions were
conveyed to government auditors, culminating in the establishment of the Iranian Auditing
Organization (IAO) in 1987. This gave the IAO a monopoly over the audit of the nationalized
companies and the partially privatized companies; however, there were a small number of
non-government-controlled, TSE-listed companies audited by private sector auditors
certified by the Economic Ministry. The IAO experienced difficulties in auditing the
variety of government-controlled entities and was not suited to auditing the increasing
number of profit-seeking companies’ post-1989. To address this issue, regulatory changes
were introduced in 1993 to allow certified public accountants to practice. However, this
regulation was ineffective because the designated certifying agency, the Iranian Association
of Certified Public Accountants (IACPA), was not established until 2001. As a result, the IAO
dominated the audit market for TSE-listed companies until 2001.
Following the establishment of the IACPA in late 2001, many small private firms were
licensed to provide audit services to listed companies, although the audit of companies with
>50% state ownership remained restricted to the IAO. The number of private audit firms
competing in the listed companies’ audit market grew quickly. As a result of this growth, the
audit market rapidly evolved away from IAO dominance. The market share of the IAO
decreased from 73% in 1998 to 24% in 2004, three years after the establishment of the IACPA,
and to 18% in 2010 (Azizkhani et al., 2017). This market structure suggests there has been
continuously intense competition among small private audit firms for the available clients.

3. Theoretical framework and research hypotheses

3.1 Relevance of accounting information
Annual financial statements can exert significant impact on the evolution of the stock price of
the listed companies at the moment of their issuance or when changes appear in the methods
of obtaining financial information (Dumontier and Raffournier, 2002). The feature of financial
information to significantly affect the investors’ decision-making process, reflected by the
stock price or stock return, is called value relevance (Beisland, 2009; El-Sayed Ebaid, 2012).
Commencing from the influence of the financial performance of one company reflected by the
income statement on the stock price or stock return, Francis and Schipper (1999) show a fall in
the relevance of the information regarding financial results. Lev (1989) maintains that this Auditor’s
trend of information explains just one part of the changes taking place explicitly in the stock report, size and
price and implicitly in the stock return. This fall determines the need to explain the changes in
the level of the stock price due to other relevant factors including the information in the
value relevance
balance sheet (Francis and Schipper, 1999), and in the case of the cash flows (Barth et al.,
2001), or other non-financial information (regarding the auditor and the audit report). The
relevance of the information regarding the auditor and the audit report underlines the
demand for audit and insurance services.
Francis and Schipper (1999) propose four approaches to studying value relevance of
accounting information as follows:
(1) Fundamental analysis view of value relevance
(2) Prediction view of value relevance
(3) Information view of value relevance
(4) Measurement view of value relevance

3.1.1 Fundamental analysis view of the value relevance of accounting information. The first
approach to studying value relevance of accounting information is fundamental view that
involves determining the intrinsic value of firm’s stocks without referring to the price at
which the firm’s stocks are traded in the capital market. Accordingly, accounting
information, through its inherent values, effects changes in stock prices, in accordance
with changes in market prices. This approach assumes that market is not efficient enough,
and the value relevance of the information content of financial statements can be evaluated
by measuring the returns generated by trading strategies (buying and selling) based on
accounting information. Therefore, relying on inefficient market information, investors can
attain unusual returns through public accounting information. This indicates that
accounting information is considered relevant only if the portfolio formed via this
information is significantly correlated with unusual returns (Bauman, 1996).
3.1.2 Prediction view of the value relevance of accounting information. The second
interpretation of the value relevance of accounting information, which is mostly common in
fundamental research field, considers those values as relevant that can be used for evaluating
the future value of the firm and forecasting the returns of the coming years. As such, the
information content of financial statements is relevant provided that it helps forecast
the inherent characteristics of value (mainly originating from valuation theories). Thus, the
information that can be used for forecasting dividend, cash dividend and future cash flows is
relevant (Francis and Schipper, 1999). Most of the literature carried out in this regard
accentuates earnings forecast.
3.1.3 Information view of the value relevance of accounting information. The term “the
value relevance of accounting information” also implies that the accounting information is
considered relevant if it helps investors in share pricing (Francis and Schipper, 1999). The
assumption of efficient capital market paves the way to explore whether investors employ
such information in their decisions. The studies conducted upon this view mostly focus on
short-term periods. The general purpose of such studies is to investigate the capital market
reaction against disclosure of accounting information within short-term periods like few days
or several weeks before or after announcement date. Therefore, during this period,
information is regarded as relevant if its disclosure or issuance undermines investors’
expectations, thereby influencing share price at capital market. So, the natural unit of capital
market metrics is stock return. According to this approach, the value relevance of accounting
information is measured in terms of market reactions to newly released information. In other
JAAR words, the accounting information value is relevant when stock exchange shows a
meaningful reaction to information disclosure. Researchers of the field typically prefer the
term "information content" to "relevance" (Beaver, 1998).
3.1.4 Measurement view of the value relevance of accounting information. The fourth
approach in studying the value relevance of accounting information conforms to the
measurement view in accounting, which regards accounting as a measurement tool. In fact, in
this approach, contrary to information approach, investors fail to make full use of available
information, and information is mostly collected from untimely sources. It can be inferred
from this approach that if one (or more) accounting item has significant relationship with
stock returns or market price, accounting size and figures will integrate and record the
information volume. The recent inference is classified in the field of indirect tests of
accounting information usefulness for valuation purposes (Dumontier and Raffournier, 2002).
Nevertheless, one of the most important consequences of such a view is that accounting
information can be considered relevant, whereas the presence of more timely information will
discredit the prior information and classifies it as irrelevant in making decisions (Barth et al.,
2001). Unlike the information approach, in this approach, both stock price and return are used
as market parameters; however, selection between these two variables depends on research
questions and hypotheses. Price-level studies examine the validity of financial statements as
a summary of events that have influenced the firm up to a specified date. On the other hand,
return-based studies address the adequacy of accounting figures in controlling and recording
those events which have affected the firm within the returns period (Easton and
Sommers, 2003).
Lambert et al. (2007) showed that the quality of accounting information is important for
the expected return on investors and it is not possible for the quality of accounting
information to be independent of the risk factor. Accordingly, the auditor, as a mechanism for
detecting significant distortions, can improve the quality of information and thus reduce the
risk of investment and optimal external organizational decisions. In this regard, some studies
have examined the effect of audit quality on the relevance of accounting information.
Previous research (Francis and Schipper, 1999; Boone et al., 2010) seeks to link audit quality to
the usefulness of accounting information and to show that auditing creates added value for
accounting information.

3.2 Audit quality and value relevance of accounting information

Auditing practice is considered as one of the fundamental parts of corporate liability
regime. In this regard, the fulfillment of corporate liability function is primarily dependent
on authentic and reliable information examined by an external and independent auditor
(Salehi and Dehnavi, 2018). Audit regulations and guidance require the existence of audit
opinion in an audit report. Some scholars use those opinions the auditor has issued on the
client’s going concern and emphasize their accuracy in predicting client’s bankruptcy as an
indicator of audit quality (Craswell et al., 2002). Of the causes that determine the emergence
of auditing services, we can mention the following: the existing gap between financial
information providers and its beneficiaries, the conflict of interests between different
financial statements’ users, the complexity of economic transactions and the effect of the
informational content of the financial statements on the investors’ decisions (Moradi et al.,
2011; Arens et al., 2012). From the perspective of the investors operating in the financial
market, Mansi et al. (2004) propound the view that auditing services provided to the listed
companies play two essential roles: an informational and an assurance role. The
informational role takes shape through the verification of the financial statements in
order to discover and report gaps in the accounting system of the client. Discovering and
reporting by the auditor of such gaps has a direct impact on the growth of the auditing
services quality (DeAngelo, 1981). The assurance role emerges at the moment of issuance of Auditor’s
the auditing opinion, giving a superior credibility and a high accuracy level of the reported report, size and
financial information (Mansi et al., 2004). Skinner and Srinivasan (2012) are inclined to
maintain that the role of assurance services is also influenced by the investors’ desire to call
value relevance
on big auditing companies which provide a superior quality of the audit and assurance
services.
Audit quality consists of two dimensions of reputation and oversight, which then refer to
the competence and independence perceived by the auditor, and then the oversight to the
actual competence and independence of auditing by stakeholders (Watkins et al., 2004).
Following previous research (Mark et al., 2009; Ittonen, 2012; Robu and Robu, 2015), therefore,
this study employs both auditing dimensions, i.e. auditor’s size, as a dimension of competence
and independence perceived from auditing, and auditor’s reports, as the real competence and
independence of auditing, to scrutinize the influence of audit quality factors on the value
relevance of accounting information.
3.2.1 Auditor’s report and value relevance of accounting information. An audit report
represents the principal communication channel between the auditor and the users of the
information displayed within the financial statements and can significantly influence the
stock price of a listed company (Ittonen, 2012). The informational content of the audit
report can influence the estimation or size of the future cash flows and implicitly the risk of
obtaining such flows. Moreover, the audit report contains information regarding the
ability of a company to continue its activity in a predictable future, thus ensuring or not the
going concern principle (Ittonen, 2012). Mutchler (1985) demonstrates the fact that
information regarding the ability of the company to continue its activity is firstly based on
the available public information, giving the chance to be anticipated by investors. The
influence of the audit report on the stock price can also be explained by the investors’
perception about the auditors’ access to the privileged information of the company, such as
the one used within certain foresights or the management plans. Thus, one considers that
the audit report reveals private information about the company, which investors can use in
order to make decisions. The stock price of an audited company can also be influenced by
the type of the audit opinion. A reserved auditing opinion can have a significant impact on
the stock price of a company, given the fact that this opinion is supported by auditing
proofs that give the investors new information regarding the financial position and
performance (Dodd et al., 1984). For the investors, the relevance of the reserved opinion is
shown by the fact that the auditing report issuance, where such an opinion is developed,
will have a negative effect on the stock price of the listed and audited company, and the
lack of such opinion will cause a growth in the investors’ trust, regarding the reported and
audited financial statements and, implicitly, a growth in the stock price (Dopuch
et al., 1986).
There is evidence that high quality, consolidated financial statement auditors improve a
firm’s management information environment. For instance Dhaliwal et al. (2016), in a
sample of M&A transactions, find evidence consistent with the presence of a common
auditor (i.e., an auditor shared by the acquirer and target firms) facilitating the flow of
target company information to acquirer managers. Similarly, Bae et al. (2017) find evidence
consistent with industry expert auditors providing useful industry-level information to
their clients. Together, these studies suggest that a high-quality consolidated financial
statement auditor helps improve the quality of information available to top managers
regarding the firm’s competitors, industry trends and potential acquisition targets. As a
mean of communication between the auditor and their users, the audit reports must be
understandable, objective and accepted by users as a relevant information source. The
relevance of the information provided by these reports is defined through the influence they
have on investors in decision making, although the users of the financial statements
JAAR would not otherwise read the reports and take them into account when making decisions
(Al-Thuneibat et al., 2008).
Based on the content of the audit report, the existing literature emphasizes the most
important reasons that may affect the stock market price and states three main reasons why
the auditor’s report can affect stock market prices (Robu and Robu, 2015). First, the audit
report can contain information that affects the estimates and risks of future cash flows and
information that is important to shareholders. Any information that affects these components
relates to investors’ decisions. Second, the audit report can contain significant information
about the continuity of the company’s operations. This position can be encouraging for those
investors who are aware of auditors’ access to the company’s internal information. This
suggests that the auditor’s statement can be a guarantee for investors. The third reason is
concerned with the fact that the auditor’s type of comment can psychologically influence
investors’ decisions in valuing a company’s stock price. Therefore, we expect auditor’s report
to be positively related to the value relevance of accounting information. Thus, we develop
the following hypotheses:

H1. There is a significant relationship between auditor’s opinion and the value relevance
of book value per share.
H2. There is a significant relationship between auditor’s opinion and the value relevance
of earnings value per share.
3.2.2 Auditor’s size and value relevance of accounting information. In audit quality literature
like Craswell et al. (2002), Ireland (2003) and Reynolds and Francis (2000), various
classifications have been used to measure audit firm size, the most important of which is
classifying audit firms into big and small ones. Other studies such as Li et al. (2008) and
Bauwhede and Willekens (2004) applied continuous variables to evaluate audit firm size.
Starting from the auditor’s size criteria, DeAngelo (1981) considers that an auditor with a
large number of clients does not display an opportunistic behavior, and the audit reports
issued by him or her display a high quality. The large-sized auditing companies provide high-
quality services (Chen et al., 2009), as a result of the possibility to train the employees and
utilize standardized auditing methodologies (Lawrence et al., 2011). The audit reports issued
by the auditing companies in the Big 4 are neutral, integral and lack errors, compared to the
companies that are not in the Big 4 (Lee and Lee, 2013). From the perspective of the auditing
service quality, auditing reports corresponding to the Big 4 and non-Big 4 companies should
not influence the financial market in a different manner, and the quality of the auditing
mission should be comparable. This phenomenon can be explained through the need to
respect the same auditing standards and professional guidelines, irrespective of the size and
notoriety of the auditing company
In general, the argument that the size of audit firms and the financial statements provided
by these firms is a major motivator and factor in auditing quality lies in the fact that larger
audit firms are less dependent on their customers because of higher revenue. As a result, they
are better able to withstand customer pressure to manage profits or issue an unqualified audit
statement. Also, audit firms with a good reputation and larger size to maintain their brand
strongly spend on training and auditing technology to maintain their credibility and
competence among their customers. As such, the cost of losing reputation gives large
auditors the motivation to maintain independence in order to provide quality auditing
according to their reputation and brand (Ittonen, 2012). Thus, it can be said that the reports
published by larger audit firms tend to reflect information impartially and accurately and
play an important role in the decisions made by investors about the stock market price.
Therefore, large audit firms appear to provide better and more reliable auditing services and
reduce the likelihood that financial statements will be the result of fraud or management
operations. They also provide audited financial statements based on unbiased, complete and Auditor’s
error-free information compared to financial statements audited by other audit firms. report, size and
So, auditing financial statements by large audit firms can be one of the factors contributing to
the decision-making process employed by investors with respect to stock market prices.
value relevance
Therefore, if a company’s goal is to increase stock prices, it can choose a large audit firm
known by investors to affect investors’ decisions and change the company’s stock price
(Robu and Robu, 2015). Therefore, it is anticipated that auditor’s size is positively associated
with the value relevance of accounting information. Thus, we develop the following
hypotheses:

H3. There is a significant relationship between audit firm size and the value relevance of
book value per share.
H4. There is a significant relationship between audit firm size and the value relevance of
earnings value per share.
As stated before, very little attention is paid to the empirical investigation of the effects of
auditor’s report and audit firm size on the value relevance of accounting information.
Nevertheless, streams of research which have separately employed the variables of the
current study are presented as follows:
In a study entitled “Auditor size and Audit Quality”, DeAngelo (1981) maintains that
larger audit firms enjoy higher audit quality as they tend to build a good reputation.
Furthermore, large audit firms with a great number of clients are not influenced by the
reduced number of their clients. Dopuch and Simunic (1982) conclude that audit quality is a
function of the number of audit procedures performed by auditors, and that large audit
firms hold more resources to conduct audit tests. Anyway, using resources to improve
audit quality is more important than the capability of using them. Davidson and Neu (1993)
argue that hiring higher (less) quality auditors can encourage (discourage) directors to
manipulate earnings to meet earnings forecast. They believe that directors have great
incentives to minimize the distinction between forecasted earnings and reported earnings,
and use accruals and other prudential accounting practices to manipulate reported
earnings and minimize the proposed distinction. Ameen et al. (1994) point to the negative
reaction of market during the period before issuing qualified audit opinions, while no
reaction is observed during the event period. Kargin (2013) reveals that the value relevance
of accounting information has improved during the years 2005–2011 considering book
values, whereas no improvement has been observed in the value relevance of earnings.
Robu and Robu (2015) implement a study about the impact of audited reports on Romanian
financial statements. Obtained results indicate that the process of auditing by large firms
and the information represented in the audit report have an impact on stock returns
regardless of the type of report and information from the financial statements. Nkanbia-
Davies et al. (2016) are concerned with examining whether corporate governance affects
value relevance of accounting information in the Nigerian capital market. To do so, they
employ the variable of audit committee independence. They document that audit
committee independence is significantly associated with value relevance of accounting
information. Lai and Liu (2018) examine how auditor characteristics (size, tenure and
industry specialization) affect the valuation of diversification. They find that diversified
firms have lower market value than single-segment firms, and the diversification discount
is smaller when firms employ Big N auditors and auditors with longer tenure. They also
report that the diversification discount is larger when companies hire auditors with
industry specialization and speculate that an industry focus may limit auditors’ ability to
detect misreporting in diversified firms. Also, diversified firms have higher financial
reporting and disclosure quality when they employ Big N auditors and auditors with
JAAR longer tenure but lower financial reporting and disclosure quality when they employ
industry specialist auditors.

4. Methodology
4.1 Sample selection
We select all publicly listed companies in TSE during the years 2008–2017. Of these initial
samples, companies with long periods without transactions and firms that are either missing
financial variables or that have insufficient data are eliminated. Financial institutions,
banking, finance and investment firms are also eliminated, since their accounting and
reporting environments differ from those in other industries. This gives a final sample of
1,530 firm-year observations (i.e. 153 firm in per year) from the fiscal years 2008–2017. Table 1
discusses the number of sample per industry.

4.2 The models and variables measurement

In order to reach the research results, the study starts from the model proposed by Feltham
and Ohlson (1995). This model links the values based on the accounting numbers (book value
of equity and net result) and the market value (calculated based on the stock price of listed
companies), according to Equation (1):
MVjt ¼ ao þ a1 BVjt þ a2 Ejt þ ejt (1)

where MVjt: Market value per share for firm j at the end of the month of issuing financial
statements, BVjt: Book value per share in year t, Ejt: reported earnings per share for firm j in year t.
As well, in order to estimate the influence of the information included in the audit report
(the auditor’s type and the auditing opinion), as well as the interactions between these and the

Panel A: Sample selection procedure

Explanation Observations

Initial sample from 2008 to 2017 3,160

Less: Firm-years with long periods without transactions (560)
Less: Firm-years with insufficient or missing data (690)
Less: Financial institutions (380)
Final sample 1,530

Industry Observations Percent

Panel B: Industry distribution

Automotive 230 15.04
Mining and metal products 170 11.11
Non-metallic minerals 150 9.80
Cement and plaster 130 8.50
Metals 170 11.11
Rubber and plastic 110 7.19
Machine tools 140 9.15
Oil, gas and petrochemicals 150 9.80
Table 1. Food 130 8.50
Sample selection Pharmaceuticals and healthcare 150 9.80
process Total 1,530 100
information in the financial statements (BVPS and EPS), the study proposes the following Auditor’s
models for analysis: report, size and
MVjt ¼ β0 þ β1 BVjt þ β2 Ejt þ β3 AOjt þ β4 BVjt 3AOjt þ β5 Ejt 3AOjt þ β6 SIZEjt value relevance
þ β7 LOSSjt þ INDFE þ YEARFE þ εj;t (2)

MVjt ¼ β0 þ β1 BVjt þ β2 Ejt þ β3 ASjt þ β4 BVjt 3ASjt þ β5 Ejt 3ASjt þ β6 SIZEjt þ β7 LOSSjt
þ INDFE þ YEARFE þ εj;t
(3)

where: MVjt: Market value per share for firm j in year t, β0: intercept, BVjt: book value per
share for firm j in year t, Ejt: Earnings per share for firm j in year t, AOjt: Auditor’s opinion for
firm j in year t, ASjt: Audit firm size for firm j in year t, SIZE: firm size for firm j in year t, LOSS:
firm loss for firm j in year t
Table 2 summarizes the definition of variables used in this paper.
Since the panel data are superior to cross-sectional or time-series data with respect to the
number of observations, and due to the lower likelihood of multicollinearity among variables,
reduced estimation bias and heteroscedasticity (Gujarati, 2009), the research model is
estimated based on panel data technique.

5. Empirical results
5.1 Descriptive statistics
To examine the general characteristics of the variables, and estimate and analyze the
research models, one requires being familiar with descriptive statistics. Descriptive statistics
computes the parameters of population and includes central indicators, distribution of
population, etc. Table 3 represents the descriptive statistics of the research variables
including mean, median, minimum, maximum and standard deviation.
As represented in Table 3, the mean (median) of MV is 6468 (3574.5). Also, the mean value
of AS indicates that about 37% of the firms are audited by audit organization. Moreover, the
mean value of AO indicates that about 46% of the opinion in the issued audit report for the
audited company is unqualified. Firm size determined as the logarithm of total sales has a
mean (median) of 6.046 (5.94) and about 9% of the firms sustains a kind of loss in fiscal year.

Variables Definition

MV Market value per share at the end of the month of issuing financial statements
BV Book value per share for firm j in year t
E Earnings per share for firm j in year t
AO 0 for companies receiving modified audit opinions (unfavorable opinion) (qualified opinion,
disclaimer of opinion, adverse opinion); 1 otherwise (unqualified, unqualified with insignificant
observations)
AS 1 if the firm is audited by audit organization, and 0 otherwise (Oradi and Izadi, 2019; Oradi et al.,
2019; Salehi et al., 2019).a
SIZE Firm size measured as the logarithm of firm’s total sales
LOSS 1 if the firm has a current year loss, and 0 otherwise
IND Industry dummy to control for industry fixed effect
Year Dummy variables to control for fiscal year effect
Note(s): aIn Iran, large international auditing firms (Big 4) do not operate. However, Iranian researchers use the
Audit Organization (as a large auditor) and audit firms that are members of the auditing community (as a small Table 2.
auditor) to measure the size of an audit firm to study the difference in audit quality Variable definitions
JAAR Variables N Mean Median Max Min Std

MV 1,530 6468.170 3574.5 64,516 408 1.311

BV 1,530 2457.155 3252.005 16,556.084 3532.515 4028.298
E 1,530 917.682 503.5 9,276 1737 1,335.552
AO 1,530 0.457 0 1 0 0.497
AS 1,530 0.373 0 1 0 0.445
SIZE 1,530 6.046 5.94 8.26 4.42 0.671
LOSS 1,530 0.094 0 1 0 0.292
Table 3. Note(s): MV, market value per share; BV, book value per share; E, earnings value per share; AO, auditor’s
Descriptive statistics opinion; AS, f audit firm size; SIZE, log of firm’s total sales; LOSS, 1 if the firm has a current year loss, and
for all variables 0 otherwise

5.2 Regression results

In panel data, F-limer test is used to determine whether the collected data are panel or pooled
data. As indicated in Table 4, the significance level of the F-limer for both models is less than
0.05. Therefore, panel data were used to estimate the research models.
Regarding the obtained results in Table 5, Hausman test is to be used to determine
whether the data are of fixed-effect or random effect types. As indicated in Table 5, the models
are suggested to be estimated based on fixed-effect method.
Moreover, the results of likelihood ratio test, which is conducted to examine the
heteroscedasticity among error terms, suggest a heteroscedasticity among them. To
eliminate this problem, generalized least square method is employed to estimate the research
models. Also, to ensure the lack of multicollinearity among the explanatory variables, the
multicollinearity test is undertaken using variance inflation factor (VIF). The results point to
the lack of multicollinearity among the mentioned variables since the values of the test are
lower than 10. Finally, as indicated in Table 6, Durbin–Watson test is used to establish if there
is a serial autocorrelation among the error terms of the models. The results of testing the
research models are presented in Table 6.
Table 6 displays the results of the regression models used to test H1–H4. As can be noted
from the Table, the F-statistic is significant at the 1% level in each of our two regression
specifications. The adjusted R2 of the estimated models is relatively high, varying between
60 and 56%.
The H1 proposes that there is a significantly positive association between auditor’s
opinion and the value relevance of book value per share. As presented in Table 6, the BV*AO
coefficient is positive, as predicted, and statistically significant at the 0.05 level, which
indicates a significant positive relationship between auditor’s opinion and the value relevance

Model F-statistics Result

Table 4.
The results of Model (1) 0.000 Panel data method
F-limer test Model (2) 0.000 Panel data method

Model Chi-square statistics Result

Table 5.
The results of Model (1) 0.000 Fixed-effect method
Hausman test Model (2) 0.000 Fixed-effect method
 Model 1 Model 2
Auditor’s
Variable AO AS report, size and
value relevance
C 0.202** (7.649) 0.283** (7.879)
BV 0.094** (3.521) 0.085** (3.207)
E 0.066** (2.919) 0.049* (2.325)
AO 0.410** (2.901)
BV*AO 0.067* (2.238)
E*AO 0.512** (2.692)
AS 0.424* (2.174)
BV*AS 0.015** (3.027)
E*AS 0.252* (2.138)
SIZE 0.023* (2.114) 0.008* (1.982)
LOSS 0.011 (0.886) 0.007 (0.639)
Industry FE Yes Yes
Year FE Yes Yes
Adjusted R2 0.599 0.561
**
F-stat 11.548 10.694** Table 6.
DW statistic 1.933 2.008 The results
Note(s): t-statistics are reported in parenthesis; **, and * denote significance at the 0.01 and 0.05 levels, of estimating the
respectively research models

of book value per share; thus providing support for H1. The estimated coefficient of the E*AO
suggests a positive and significant relation between auditor’s opinion and the value relevance
of earnings value per share at 0.05 level of significance. Therefore, H2 is also supported.
Furthermore, according to the H3 that states there is a significantly positive relationship
between audit firm size and the value relevance of book value per share, the estimated
coefficient for BV*AS shows a positive and significant relation between audit firm size and
the value relevance of book value per share at 0.05 level. Finally, the estimated coefficient for
E*AS reveals a positive and significant relation between audit firm size and the value
relevance of earnings value per share at 0.05 level. This finding lends support to H4. Overall,
our finding suggests that financial reports of companies that have been audited by big
auditors reflect accounting information more objectively and accurately and it plays an
important role in investors’ decisions about stock prices. Therefore, investors place more
value on accounting information of firms that have been audited by big auditors. In addition,
the type of auditor’s report can be another factor influencing investors’ decisions and value
relevance of accounting information.

5.3 Sensitivity analysis and robustness check

5.3.1 Alternative measure of auditor’s attributes. To ensure the further robustness of our
findings, we re-estimate our analysis using auditor industry specialization (SPEC) as an
alternative measure of auditor’s attributes, which have been extensively used in prior
accounting and auditing literature (Fernando et al., 2010; Hakim and Omri, 2010; Rusmin,
2010). Following Almutairi et al. (2009) and Hakim and Omri (2010), we calculate
specialization based on the percentage of total client sales an auditor audits in a specific
industry during a given year. Hence, specialization is measured as:
PJik
j¼1 ClientSalesijk
MSik ¼ PIk PJik
i¼1 j¼1 ClientSalesijk

where
JAAR Variable Coefficient t-statistic

C 0.312** 7.659
BV 0.082** 3.212
E 0.121* 2.415
SPEC 0.455** 2.813
BV* SPEC 0.0168* 2.373
E* SPEC 0.219** 3.185
SIZE 0.023* 2.107
LOSS 0.015 0.751
Industry FE Yes
Table 7.
Effects of alternative Year FE Yes
measure of auditor’s F-stat 11.880** DW statistic 2.105
2
attributes on value R 0.612 Adjusted R2 0.601
relevance Note(s): **p < 0.01 and * p < 0.05, respectively

Clientsalesijk 5 total sales of client firm j in industry k audit by auditor I.

I 5 1, 2, I 5 an index for audit firms.
j 5 1, 2, J 5 an index for client firms
k 5 1, 2, K 5 an index for client industry.
Ik 5 the number of audit firms I in industry k.
Jilk 5 the number of clients served by audit firm I in industry k.
When auditor i’s market share is greater than 10% in Industry k, the auditor I is treated as
an industry specialist. Table 7 presents the regression results for the effect of auditor’s
attributes on the value relevance of accounting information when the alternative auditor’s
attribute measure (SPEC) is used. The results indicate that auditor’s attribute calculated by
the SPEC is positively associated with value relevance of accounting information, which is
consistent with the results of our main analyses reported in Table 6. These results suggest
that our findings are robust to the alternative measure of auditor’s attributes.

6. Conclusion
On a financial market, investors need relevant and fair information on which to base their
decisions. Investors seek instruments to assess the information quality which can indicate the
stock that can reward them with high performance. To answer the investors’ problem,
financial statements must be audited, receiving an opinion related to the quality of reported
financial information. Transparency and high quality of financial information are very
important because it is the base of the optimal economic decisions of investors and creditors.
Before the twentieth century, auditing was mostly dedicated to uncover frauds. At the
beginning of the new century, however, it aimed to explore whether financial statements
present an accurate and fair description of financial condition, results of operations and
changes in financial conditions. Nowadays, auditing increases the reliability of financial
reports while reduces the risks of making economic decisions.
One of the important properties of accounting information is its relevance, which plays an
important role in decision-making processes. A rise in the value relevance of accounting
information including earnings per share and book value per share is of great importance in
drawing investment and selling the stocks of existing firms (internal users) and increasing
investor’s decision-making ability (external users). This issue that to what extend an auditor’s
report that accredits financial statements can promote the value relevance of earnings per
share and book value per share as two indicators of accounting information is still open to
new research. Therefore, current study aims at investigating the effect of auditor’s report and
audit firm size on the value relevance of accounting information of the firms listed in Tehran Auditor’s
Stock Exchange. According to the theoretical foundations proposed in the study, the report, size and
following findings were obtained as a result of testing the research hypotheses:
First and second hypotheses of the study considered the relationship between auditor’s
value relevance
opinion and value relevance of book value and earnings per share. The results indicate a
significant and positive relationship between type of opinion and book value and earnings
per share. These findings are compatible with those of Filip and Raffournier (2010), which
state that the quality of auditors’ activity and their opinion result in the relevance of
accounting information, improve the financial information system of the country and finally
optimize the economically decision-making processes. Form the traditional point of view, the
relevance of value is synonymous with the concept of high correlation with market
information and most accounting information is correlated with market price or return. In
other hands, the ruling audit environment in an enterprise plays a significant role in order to
provide high-quality information. In fact, audit creates a mechanism to provide transparent
and reliable information. Robu and Robu (2015) and Ittonen (2012) also came up with the same
results.
Third and fourth hypotheses of the research examined the relationship between audit
firm size and value relevance of book value and earnings per share. The results indicate a
significant and positive relationship between audit firm size and book value and earnings
per share. Therefore, one can argue that large auditing firms implement auditing services
with higher quality on account of possessing more resources, equipment and reputation;
and hence the quality of financial reporting and the prediction power of these reports will be
increased and thereby resulting in high value relevance of accounting information. These
findings are compatible with those of DeAngelo, which maintains that larger firms, due to
their higher credit, enact better auditing practices. The results of testing these hypotheses
are similar to the results of Lee (2013) and Robu and Robu (2015), which believe that larger
audit firms offer higher quality services as they tend to acquire more reputation in
marketplace. Since they have a great number of clients they are not worried about losing
their reputation.
Our findings have implications for policy makers, regulators, managers and investors.
Our evidence on the positive association between auditor’s size and value relevance of
accounting information should help policy makers and regulators which they improve value
relevance of accounting information and financial reporting by integrating small audit firms
and setting up larger audit firms. In addition, our findings have implications for the managers
of public companies. Managers of listed firms should improve the firm’s value relevance of
financial reporting by choosing the larger audit firms. In addition, they need to improve the
value relevance of accounting information by increasing the quality of financial reporting
and, consequently, obtaining unqualified audit reports. With regards to investors, our
findings demonstrate that because auditor’s attributes improve value relevance of
accounting information, investors should consider the auditors size and opinion when
making investment decisions and prioritize firms that have been audited by big auditors, as
well as firms whose audit reports are unqualified.
In conclusion, it should be noted that our study has several limitations. Firstly, the model
used in this study may omit some variables correlated with value relevance of accounting
information. While we have added some control variables, we may not have successfully
identified all potential correlated omitted variables. Secondly, this study only considers a
quantitative aspect of the relationship between auditor’s attributes and value relevance of
accounting information. Semi-structured interviews with relevant parties involved in
establishing the auditing profession regulations and policy makers may provide a more
profound understanding of other auditor’s attributes that affect value relevance of
accounting information.
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Corresponding author
Yasser Rezaei Pitenoei can be contacted at: rezaei.yasser@gmail.com

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