Audit quality and information asymmetry between traders


  • This paper draws from the results of Tingting Zhu’s PhD thesis at the University of Technology Sydney (UTS) with financial support for the research provided by the School of Accounting at UTS and the Capital Markets Co-Operative Research Centre (CMCRC). Data support for the study has been provided by CMCRC, UTS, the Securities Industry Research Centre for Asia Pacific (SIRCA) and the University of New South Wales (UNSW).


In this study, we investigate the association between audit quality and information asymmetry between informed and uninformed traders. We employ three proxies for information asymmetry – absolute price differences, absolute volatility differences, and absolute differences in the long/short ratio of trades – between US stock and options markets and represent audit quality through the appointment of Big n and industry specialist auditors. For a sample of 4062 firm-years between 2002 to 2005, our results indicate that the appointment of Big n and industry specialist auditors is associated with lower information asymmetry measures. Our results are consistent with audit quality playing a role in the quality of financial reporting information and flowing through to the allocation of information among traders.