Earnings Quality and Audit Quality: Analysis of Investor Reaction

Abstract

This study aims to analyze investor reaction to management behavior in preparing financial reports, especially earnings quality and audit quality. We also analyze the effect of financial performance as moderation. Generally, investors react positively to a company's financial performance, but the amount of fraud surrounding financial information, including auditor cooperation, raises big questions for investors about a company's financial information. We analyzed companies within the manufacturing sector that were listed on the Indonesia Stock Exchange from 2015 to 2019, and it was found that investors reacted positively to earnings quality and audit quality moderated by financial performance. These results provide evidence that management should focus on earnings quality in financial reports and on the audit process to ensure quality and exceptional financial performance to obtain positive reactions from investors, which has a positive impact on increasing the value of companies’ shares. This study used the stock prices on the publication date of the financial statements, which reflect the direct reactions of investors to the information contained in the financial statements, such as earnings quality, audit quality, and financial performance. The different investor reactions were apparent on the day of the deadline for submitting financial statements according to existing regulations. These results reflect that the use of stock prices on the publication dates more accurately describes the reaction of investors than on the deadline for submitting financial statements.