The response of capital markets to the regulation of communication with audit committee concerning independence: the case of ISB No. 1

The purpose of this thesis is threefold. First, it tests the effect of news announcements related to ISB No. 1 on equity value in order to empirically examine the objective of this standard, namely whether discussions on audit independence between audit committees and auditors enhance audit independence and consequently increase shareholder wealth. Second, given that ISB No. 1 aims to enhance audit independence and the quality of financial reporting, which in turn reduces information asymmetry, this study tests whether information asymmetry was reduced following the passage of ISB No. 1. Third, a cross-sectional analysis is conducted to examine whether certain risk characteristics of firms are likely to vary the stock price effect of ISB No. 1. Three attributes are examined, namely information risk (proxied by the implied cost of equity), audit committee characteristics (proxied by audit committee size and audit committee independence), and audit quality (proxied by industry specialist auditors). The empirical evidence shows that investors reacted positively to all ISB No. 1-related news announcements and that the bid-ask spread narrowed following its passage. The results also show that firms with higher implied costs of equity and those with smaller audit committees experienced higher cumulative abnormal returns around the passage of the standard. Finally, the results show that the cumulative abnormal returns around the passage of ISB No. 1 were unrelated to firms with independent audit committees as well as those that employed industry specialist auditors.