Information content of audit reports with respect to delisting in Thailand

Abstract

This research analyses empirical evidence of the relationship between audit reports (i.e. going concern audit reports and all types of audit qualifications) and delisting factors in stock markets. The data set comprises quoted companies between 1994 and 2000 in the emerging Thai Stock Market. The research methodology is developed based on the work of Lennox (1999a). Conditional probability, mainly logit regression is employed. Potential factors, both adopted from previous studies and introduced by the present study, cover three main areas: macroeconomic factors, company internal factors, and audit reports. The findings indicate that the potential factors are not important determinants of voluntary delisting. On the other hand, the empirical results show that going concern qualifications issued under modified opinions are a predictor of mandatory delisting. However, going concern qualification issued under both unqualified opinions with explanatory paragraphs and also under modified opinions do not signal useful incremental information about the probability of mandatory delisting. This study also finds that when the lagged effect is taken into account, all types of audit qualifications issued under modified opinions are important determinants of mandatory delisting. apart from audit reports, a decrease in Gross Domestic Product (GDP) significantly influences mandatory delisting probability. In addition, the study finds that bad trading record announcements by the Thai Stock Exchange provide useful incremental information about the probability of mandatory delisting. In addition, a decrease in short-term liquidity and gross cashflow indicate that low profits increase liquidity problems and the likelihood of mandatory delisting. Finally, the analysis also indicates that the size of auditing firms (Big 5 and Non-Big 5), debt-turnover, gearing ratios and returns on capital are unlikely to be factors influencing mandatory delisting probability.

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