Value relevance of audit opinions in an emerging market: evidence from Morocco

Abstract

Purpose This paper aims to determine whether audit opinions in Morocco, an emerging market, are value relevant to the stock market, through the investigation of the market reaction to the issuance of modified audit opinions (MAOs). Design/methodology/approach The event study approach is used. The data are derived from the financial reports of listed companies on the Casablanca Stock Exchange over a period of 10 years from 2010 to 2019. Findings This paper does not find evidence that the market reacts to the issuance of MAOs when grouped together. When partitioning the sample by types, there is an evidence of a stock market reaction to qualified audit opinions and the qualified audit opinions with observation paragraph when they are combined with a negative variation of earnings per share. Examination of the impact of different natures of qualifications shows no consistent results and that the market does not distinguish between natures of qualifications. Research limitations/implications These results may be due to the fact that some investors have information about the audit opinion long before it is made public, due to privileged access to audit opinions, or that investors underestimate audit opinions relative to other financial indicators. Originality/value This study contributes to the existing literature by investigating an emerging market, not previously tested, after the introduction of several regulatory reforms in Moroccan market aimed at enhancing transparency in financial reporting. It refines the market reaction models used in previous studies by using both ordinary least squares and the Scholes–Williams techniques that correct for the effect of thin trading on the market index. In addition, special attention is given to studying the market reaction to each type of MAOs and to each natures of qualifications.