The role of audit quality on market consequences of voluntary disclosure: Evidence from East Asia

Purpose: The purpose of this paper is to investigate the role of the auditor in enhancing the market consequences of voluntary disclosure in East Asian countries that have different reporting environments. This study also investigates the effect of quality of the reporting environment on the role of the auditor in enhancing market consequences of voluntary disclosure. Design/methodology/approach: The methodology used in this research is multiple regressions using the least square method. This research uses East Asian countries context that covers India, Indonesia, Japan, Malaysia, the Philippines, Singapore and Thailand with cross-sectional data during 2016. This research uses four measurements of market consequences, namely, cumulative abnormal return (CAR), volatility of return, bid-ask spread and trading volume. Findings: The results show that voluntary disclosure gives positive consequences to the capital market by increasing the CAR, volatility of return and average trading volume, and decreasing asymmetric information. The results also show that auditor plays a significant role in increasing the credibility of voluntary disclosure by increasing the market consequences of disclosure. The role of the auditor in increasing the effect of voluntary disclosure is higher in a country that adopts international best practice in financial reporting. Research limitations/implications: The findings of this study need to be interpreted with caution due to several limitations. Although the measurement of voluntary disclosure used in this study is relatively more complete compared to previous research, there are still much voluntary information disclosed that are not included in the checklist. Moreover, this study only considers voluntary disclosure in the annual report. Therefore, future studies can develop a more comprehensive measurement of voluntary disclosure and use sources of information beyond the annual report. Practical implications: This study shows that in a reporting environment that is less transparent as in the conditions of countries in East Asia, voluntary disclosure and the role of the auditor in increasing value of voluntary disclosure for market participants is crucial. Companies need to increase their voluntary disclosures as they become additional provisions in improving the reporting environment and consider the result of this study when choosing the auditor. Second, audit quality is more important in increasing the credibility of voluntary disclosure in countries that adopt international best practices in financial reporting. The result of this study implies that audit quality is a complementary mechanism of the reporting environment. Originality/value: This study expands the literature of the role of the auditor on the market consequences of voluntary disclosures and explores the role of the auditor in different reporting environment across countries in East Asia. This study shows that auditor increases the credibility of voluntary disclosure in the different context of accounting and auditing practices.