The influence of individual partner auditor quality on stock price synchronicity and crash risk

Abstract

Purpose: This study examines how improvements in auditor partner quality affect the stock price dynamics of client firms by focusing on synchronicity and crash risks. Synchronicity reflects how positively a firm’s stocks are consistent with market volatility, whereas crash risk captures the potential for sudden and severe declines. This study contributes to research on audit quality, market efficiency and financial stability by providing insights for regulators and investors on the role of auditor quality in enhancing market efficiency and reducing crash risks. Design/methodology/approach: Using panel data from Taiwan’s publicly listed firms (2005–2021), we applied the fixed-effects methodology of Bertrand and Schoar (2003) and Aobdia et al. (2015) to assess auditor partner quality. Audit quality is measured using the standardized ranks of firm and partner fixed effects, with higher ranks indicating higher quality. Findings: The findings show that although individual audit quality has a minimal impact on stock price synchronicity, it significantly reduces crash risk. High-quality audits enhance financial reporting and investor confidence and lower the chances of panic selling during adverse events, thus helping the market absorb negative news. These results underscore the critical role of auditor quality in promoting financial stability and trust despite its limited effect on synchronicity. Research limitations/implications: Our findings of studies utilizing fixed effect methodology may not be generalizable beyond the specific context in which the data were collected. This limitation is particularly relevant if the data used is from a specific industry, region or time period. Practical implications: The findings of this study offer several practical insights for regulators, investors and policymakers. Regulators can promote financial stability by encouraging higher audit partner quality through stricter standards and rotation policies. Investors may use auditor quality as a signal of reliable reporting to make informed decisions and mitigate crash risks. Firms engaging high-quality auditors can enhance reporting credibility, attract long-term investors and reduce volatility during negative events. Strengthening audit quality supports market efficiency, lowers crash risks and boosts investor confidence. Social implications: Improved audit partner quality promotes transparency and accountability, fostering public trust in financial markets. It reduces the likelihood of sudden market crashes that can harm investors and destabilize economies, protecting individual wealth and pension funds. Additionally, by enhancing market efficiency, high audit quality contributes to sustainable economic growth and financial stability, benefiting society at large. These improvements support responsible corporate governance, align firms with stakeholder interests and reduce the social costs associated with financial misconduct or market disruptions. Originality/value: Audit quality plays a crucial role in stock price dynamics, influencing both stock price synchronicity and crash risk. Stock price synchronicity measures the extent to which a company’s stock moves in line with broader market or industry trends, with high synchronicity indicating that market-wide factors dominate and low synchronicity suggesting greater influence from firm-specific information. On the other hand, stock price crash risk refers to the likelihood of a sudden, severe price drop, often triggered by financial mismanagement, fraud or unexpected negative events. High-quality audits can reduce crash risk by enhancing financial transparency and mitigating information asymmetry.