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Role of audit
The role of audit quality on quality on
market consequences of market

voluntary disclosure
Evidence from East Asia
Ratna Wardhani Received 31 March 2018
Revised 27 September 2018
Department of Accounting, 12 February 2019
Universitas Indonesia Fakultas Ekonomi, Depok, Indonesia 26 April 2019
Accepted 28 June 2019

Abstract
Purpose – The purpose of this paper is to investigate the role of the auditor in enhancing the market
consequences of voluntary disclosure in East Asian countries that have different reporting environments.
This study also investigates the effect of quality of the reporting environment on the role of the auditor in
enhancing market consequences of voluntary disclosure.
Design/methodology/approach – The methodology used in this research is multiple regressions using the
least square method. This research uses East Asian countries context that covers India, Indonesia, Japan,
Malaysia, the Philippines, Singapore and Thailand with cross-sectional data during 2016. This research uses
four measurements of market consequences, namely, cumulative abnormal return (CAR), volatility of return,
bid-ask spread and trading volume.
Findings – The results show that voluntary disclosure gives positive consequences to the capital market by
increasing the CAR, volatility of return and average trading volume, and decreasing asymmetric information.
The results also show that auditor plays a significant role in increasing the credibility of voluntary disclosure
by increasing the market consequences of disclosure. The role of the auditor in increasing the effect of
voluntary disclosure is higher in a country that adopts international best practice in financial reporting.
Research limitations/implications – The findings of this study need to be interpreted with caution due to
several limitations. Although the measurement of voluntary disclosure used in this study is relatively more
complete compared to previous research, there are still much voluntary information disclosed that are not
included in the checklist. Moreover, this study only considers voluntary disclosure in the annual report.
Therefore, future studies can develop a more comprehensive measurement of voluntary disclosure and use
sources of information beyond the annual report.
Practical implications – This study shows that in a reporting environment that is less transparent as in the
conditions of countries in East Asia, voluntary disclosure and the role of the auditor in increasing value of
voluntary disclosure for market participants is crucial. Companies need to increase their voluntary disclosures
as they become additional provisions in improving the reporting environment and consider the result of this
study when choosing the auditor. Second, audit quality is more important in increasing the credibility of
voluntary disclosure in countries that adopt international best practices in financial reporting. The result of this
study implies that audit quality is a complementary mechanism of the reporting environment.
Originality/value – This study expands the literature of the role of the auditor on the market consequences
of voluntary disclosures and explores the role of the auditor in different reporting environment across
countries in East Asia. This study shows that auditor increases the credibility of voluntary disclosure in the
different context of accounting and auditing practices.
Keywords Voluntary disclosure, East Asia, Audit quality, Accounting standard, Market consequences
Paper type Research paper

1. Introduction
In a more global setting of the capital market, transparency of information through disclosure
mechanism is becoming an important issue for the company (Choi and Meek, 2009). On the other
hand, companies mmet spend a lot of money to disclose information comprehensively.
Previous studies proved that disclosure provide economic consequences by reducing the cost of
equity (Botosan, 1997) and cost of debt (Sengupta, 1998), enhancing stock market liquidity Asian Review of Accounting
(Copeland and Galai, 1983; Glosten and Milgrom, 1985; Demsetz, 1964), reducing estimation risk © Emerald Publishing Limited
1321-7348
(Klein and Bawa, 1976; Coles et al., 1995; Clarkson et al., 1996), reducing information asymmetry DOI 10.1108/ARA-03-2018-0083
ARA and lowering bid-ask spreads (Diamond and Verrecchia, 1991; Welker, 1995; Healy et al., 1999;
Bloomfield and Wilks, 2000; Cheng et al., 2006; Jiang et al., 2010).
The level of economic consequences of disclosure published in the annual report depends
on the credibility of the report itself. As part of external monitoring mechanisms, auditors
play a significant role in ensuring the credibility of information disclosed by management.
Auditors maintain their reputation by increasing the credibility of the financial report that
he/she audits (Teoh, 1992a). Previous studies show evidence of the role of the auditor in
increasing economic consequences of earnings number. Lang and McNichols (1990) state
that the predictability of earnings increases with high-quality auditors.
Furthermore, despite the reliability of information disclosure in the company’s annual
report outside of the scope of the audit carried out by the auditor, International Standard on
Auditing (ISA) 720 (Revised) (2015) states that auditor has responsibilities relating to other
information in documents containing audited financial statements and the auditor’s report.
“Documents containing audited financial statements” refers to annual reports (or similar
documents), that are issued to owners (or similar stakeholders), containing audited financial
statements and the auditor’s report. Based on ISA 720 (Revised) (2015) the material
inconsistencies between the audited financial statements and other information may impair
the credibility of the audited financial statements. ISA 720 (Revised) (2015) states that the
auditor is responsible for identifying inconsistencies and material misstatements of fact in
the information disclosed in documents containing audited financial statements. Based on
ISA 720 (Revised) (2015), the auditor’s role in increasing the credibility of voluntary
disclosure is crucial. The previous research has not mentioned how the quality of audit
affects the economic consequences of voluntary disclosures.
The consequences of increased disclosure might be different across countries due to
differences in accounting and auditing practices. Accounting and auditing practices that
consistent with international best practices play an essential role in improving the quality of
the information disclosed by the company. Many studies examine the effect of adoption or
convergence of international accounting standard by using different context and countries,
methodology and measurement on several market-based variables such as share price
volatility (Auer, 1998), bid-ask spread and trading volume (Leuz, 1999), and the accuracy of
analysts’ forecast errors (Ashbaugh and Pincus, 2001). These previous studies rely on the
assumption that international accounting standards require a higher disclosure level
because of the use of principle-based standards compare than local countries standard and
other international standards.
This paper aims to investigate the auditor role in increasing the market consequences of
voluntary disclosure in a different context of accounting and auditing practices. This
research contributes in several ways. First, this study develops a more comprehensive
checklist to measure voluntary disclosure based on Botosan (1997) and Francis et al. (2008).
This study measures the voluntary disclosure by using nine groups of topics, namely:
customer focus; internal business; learning and growth; asset utilization; cost reduction;
revenue growth; projected information; other financial measurements; and non-financial
measurements. The total questions in the checklist are 79 questions. Second, this study uses
more comprehensive measurement as proxies of market consequences, such as cumulative
abnormal return (CAR), price volatility, trading volume and bid-ask spread. Third, this
research also contributes the literature by considering the cross-country differences of
reporting environment especially in accounting and auditing practices on the role of the
auditor in the market consequences of increased disclosure. This study shows that auditor
serves the credibility-increasing mechanism of voluntary disclosure in the different context
of accounting and auditing practices. Fourth, this study uses East Asia as the study setting,
represented by seven East Asian countries, namely: India, Indonesia, Japan, Malaysia, the
Philippines, Singapore and Thailand. These countries are chosen because of the different
characteristics among them in terms of accounting and auditing practices. This study Role of audit
extends Fan and Wong (2002 and 2005) that already study the East Asia context. Fan and quality on
Wong (2002) examine the link between corporate ownership and informativeness of market
earnings, whereas Fan and Wong (2005) examine whether the auditor in East Asia countries
has a corporate governance role. This research adds to the understanding of the role of
auditors in the East Asian context by presenting empirical evidence about the auditor’s role
in the economic consequences of voluntary disclosure.
The mixed results of previous studies can be caused by differences in the country setting
of previous research. This highlights the importance of cross-country study and the
examination of the effect of the reporting environment on the relationship between audit
quality and the economic consequences of voluntary disclosures. By using samples from
countries in East Asia, this study provides empirical evidence that auditors can increase the
economic consequences of voluntary disclosure. This study also provides empirical
evidence that the role of the auditor in increasing the effect of voluntary disclosure is higher
in a country that adopts international best practice in financial reporting. This study shows
that the effectiveness of the auditor in increasing the credibility of information depends on
the country’s reporting environment.
Furthermore, the organization of this paper is as follows. Section 2 explains the literature
and the development of hypotheses. Section 3 explains the research methodology which
consists of data and samples, model development and operationalization of variables. While
Section 4 describes the results of the study. This paper concludes with conclusions,
implications and limitations of the research presented in Section 5.

2. Literature review and hypothesis development

2.1 The link between voluntary disclosure and market consequences
Voluntary disclosure is one of the tools to minimize the market failure caused by
information problem. Botosan (1997) stated that there are two streams of research on the
economic consequences of voluntary disclosure. First, it is related to the reduction of the
transaction cost. The reduction of transaction cost is made by lowering the adverse selection
component of bid-ask spreads (supported by Amihud and Mendelson, 1986; Diamond and
Verrecchia, 1991). Second, it is related to estimation risk. A higher level of disclosure can
reduce non-diversifiable estimation risk (Klein and Bawa, 1976; Barry and Brown, 1984;
Coles et al., 1995; Handa and Linn, 1993; Clarkson et al., 1996). Thus, high-quality of
disclosure as part of transparency can make the stakeholders better informed. As stated by
Watson et al. (2002) and Xiao et al. (2004), as well as Beattie and Smith (2012) and according
to the disclosure theory, the firms have incentives to provide more voluntary disclosures if
their benefits offset their costs.
Previous studies show the market consequences of voluntary disclosure in the form of
return, information asymmetry and price volatility. Diamond and Verrecchia (1991), Welker
(1995), Healy et al. (1999) and Bloomfield and Wilks (2000) show that higher disclosure
reduces information asymmetry. Recent studies by Cheng et al. (2006) and Jiang et al. (2010)
also point out that voluntary disclosure negatively affects the asymmetry of information
between companies and investors.
Most recent studies on various types of disclosure and in different setting also indicate
that voluntary disclosure of the company has market consequences. H.I. Yang (2012)
examines the capital market consequences of managers establishing an individual
forecasting style. The study finds that when information uncertainty is high and when the
manager has a history of issuing more accurate forecasts, the stock price reaction of
management forecast news is stronger. The results indicate that individual managers
benefit from establishing a personal disclosure reputation. Moreover, using voluntary
disclosures made through the CSRwire news service, Griffin and Sun (2013) find that
ARA managers’ disclosure decisions involving greenhouse gas emissions produce positive
returns to shareholders. Bischof and Daske (2013) state that a mandatory one-time
disclosure induces an increase in voluntary disclosures about sovereign risk in the following
periods. The shift in the voluntary disclosure equilibrium increases the liquidity of banks’
shares. In the last decade, a number of studies about voluntary disclosures were also
conducted in developing countries such as Malaysia (Mohd Ghazali and Weetman, 2006),
Kuwait (Al-Shammari, 2008), Turkey (Uyar et al., 2013), Iran (Sadegh et al., 2013), Egypt
(El Assy, 2015) and Tunisia (Talbi and Omri, 2014).

2.2 The role of auditor in increasing credibility of voluntary disclosure

One of the biggest assets of auditors is their reputation. To maintain their reputation auditor
always try to keep their quality. Skinner and Srinivasan (2012) show the importance of
auditors’ reputation for quality in a setting where litigation plays virtually no role. Aobdia
et al. (2015) show that using Taiwan as the study context; individual audit partners provide
informational value to capital market participants beyond the amount provided by the
identity of the audit firms. Moreover, Michas (2011) shows that audit quality is higher for
client companies located in countries with a more developed audit profession, after
controlling for the rule of law and investor protection.
Moreover, the conformity of the amount of income and the value of the company
increases if the numbers reported accurately reflect economic values (Teoh, 1992b). The real
economic value cannot be observed directly so that the investors have to rely on the
reported number. Investors only rely on the financial data if the reported figure is credible.
The credibility of the reported figure can be reflected by the attestation role of auditing that
certifies the accounting number based on generally accepted accounting principles (GAAP)
(Abdel-Khalik and Solomon, 1988). A more skillful auditor presumably be able to bring
closer concordance of the reported earnings with GAAP (Teoh and Wong, 1993).
Previous research related to the impact of audit quality on voluntary disclosure are
mixed and using the context of developed countries or with one country setting. Singhvi
and Desai (1971) and Firth (1979), for example, use the USA as their research setting and
they state that the corporations which disclose inadequate information are likely to be
audited by a small CPA firm. Meanwhile, Hossain et al. (1995) and McNally et al. (1982)
using the New Zealand context find that the type of auditor was not significantly related
to the level of voluntary disclosure. Depoers (2000) and Raffournier (1995) also find
insignificant links between auditors and corporate disclosures using the context of
European companies.

2.3 Hypothesis development on the role of auditor in increasing market consequences of

voluntary disclosure
Previous research studies show evidence of the role of the auditor in increasing economic
consequences of the earnings number. Lang and McNichols (1990) state that greater
conformance of the financial report with GAAP assured when high-quality auditors audited
the financial statement. Therefore, the predictability of earnings increases with high-quality
of auditors. Moreover, Teoh (1992b) state that there is higher conformity of earnings number
and value of the firm if the reported number accurately reflects economic value.
Nevertheless, investors cannot observe the true economic value directly so that they have to
rely on the reported number. Francis and Krishnan (1999, 2002) state that one of the reasons
why investors have greater trust in the quality of reported earnings of firms audited by Big
4 is because, for the same set of client circumstances, Big 4 auditors are more likely to issue
going-concern warnings than non-Big 4 auditors. Investors only rely on the financial data if
the reported figure is credible.
 The explanation above refers to the role of auditors in improving the quality of Role of audit
information disclosed in financial statements. In the audit process, the auditor does not quality on
have the responsibility to audit the information presented in the annual report. However, market
based on ISA 720 (Revised) (2015), the auditor has responsibility for other information in
documents containing audited financial statements. The material includes the company’s
annual report so that voluntary disclosure disclosed in the annual report is also
information referred to in the standard. ISA 720 (Revised) (2015) requires auditors to read
that other information to identify material inconsistencies, if any, with the audited
financial statements. If, after reading the other information, the auditor detects a material
inconsistency, the auditor shall determine whether the financial statements or the other
information needs to be revised or if the auditor becomes aware of the apparent material
misstatement of the facts, the auditor must discuss the matter with management. Based on
the standard, auditors are required to evaluate the information contained in the document
in which there are financial reports, such as annual reports. Thus the auditor performs its
monitoring function of information disclosed by the company. A qualified auditor will
increase the credibility of that information.
Moreover, Ball et al. (2012) described the missing link between the role of the auditor in
the financial auditing statement and the information disclosed in the annual report. Ball
et al. (2012) explained the link through the hypothesis called the confirmation hypothesis.
Confirmation hypothesis is built from Ball et al. (2012) argumentation which states that the
primary role of financial reporting is to supply auditable backward-looking financial
outcomes for efficient contracting with the firm, including the provision of managers as
agents through credible mechanisms commit to disclose private, forward-looking
information to users as principals. Audited financial statements are a relatively inefficient
mechanism for communicating new and forward-looking information to the stakeholders
because it is costly due to the need for independent verification. In contrast, voluntary
disclosure by managers primarily has an informational role, by providing forward-looking
information that is only known to managers, provided it can be rendered credible. Voluntary
disclosure is characterized by regulatory hurdles, lack of structure and lack of audibility.
These characteristics accord greater flexibility to voluntary disclosure and make it a
potentially more efficient mechanism for managers to communicate their private
information promptly. Complementarity implies that financial reporting is input to the
firm’s total information environment, and can only be evaluated by its contribution to the
efficiency of the complete system of communicating with investors and other users. This
complementary relation between audited financial statements and voluntary disclosure is
termed the confirmatory role of financial reporting. Because private information disclosure
and audited financial reporting are complements, their economic roles cannot be evaluated
separately. Furthermore, Ball et al. (2012) showed that the market reaction to management
forecasts as part of voluntary disclosure is an increasing function of the resources
committed to independent audit.
Based on the above explanation, the first hypothesis is proposed as follows:
H1. Positive market consequences of voluntary disclosure in East Asian countries is
higher for firms audited by Big 4 accounting firms than firms audited by non-Big
4 accounting firms.

2.4 Hypothesis development on the moderating effect of accounting and auditing practice
on the role of auditor in increasing market consequences of voluntary disclosure
Accounting and auditing practices that are consistent with international best practices have
an important role in the firm reporting process. It promotes the transparency of information
and comparability of the financial statements to protect the investors. In the end, the
ARA alignment to international best practices in accounting and auditing can improve the quality
of the information disclosed by the company.
The International Financial Reporting Standards (IFRS) has some characteristics: it is
principle based, it offers fair value orientation and it has lesser accounting policy
alternatives and higher disclosure requirements (Anggraeni and Wardhani, 2017). Many
studies examine the effect of adoption or convergence of international accounting standard on
several QJ;market-based variables such as share price volatility (Auer, 1998), bid-ask spread
and trading volume (Leuz, 1999), and the accuracy of analysts’ forecast errors (Ashbaugh and
Pincus, 2001). Armstrong et al. (2010) study the IFRS in Europe and show a consistent result
that investors are expecting net convergence benefits from IFRS adoption. They find a positive
reaction to IFRS adoption events for firms with high-quality pre-adoption information.
From the Asian perspective, Wardhani et al. (2015) find that IFRS convergence reduces
earnings management. Wardhani et al. (2015) state that the effect of the degree of
convergence of local GAAP to IFRS on financial reporting quality is greater for companies’
in countries with weak investor protection. Accounting standards that converge to
international standards substitute the weakness of the legal system of the county. Using
different context and countries, methodology and measurement, most of the previous
studies rely on the assumption that international accounting standards require a higher
disclosure level compare to local countries standard and other international standards.
The quality of the accounting standard is part of the investor protection environment.
Francis and Wang (2008) examine whether earnings quality is jointly affected by the
country level investor protection and the firm’s choice of a Big 4 vs non-Big 4 auditors. They
find that earnings quality is higher in a country with stronger investor protection, but only
for firms that are audited by Big 4 auditors. One of the key roles of auditing is to enforce the
implementation of proper accounting policies, based on the accounting standards. If the
managers prefer discretion in the reporting process, and auditors may go along with
earnings management behavior, then clients will report a low-quality of earnings. However,
auditor’s incentives may change if the investor protection regimes become stricter and
stricter investor protection may increase the likelihood of the client’s misreporting being
detected and auditors are punished if they do not report it. The study implies that
institutional environment such as investor protection as well as accounting standard
strengthens the effect of audit quality in affecting earnings quality. Kwon et al. (2007) also
find that clients of industry specialist auditors have lower discretionary current accruals
and higher earnings response coefficients than clients of non-specialist auditors and they
find that the impact of auditor industry specialization on earnings quality increases as the
legal environment weakens.
In the different context of accounting standard, auditor plays a different role in ensuring
the credibility of information. For example, if a country adopts principle-based accounting
standards like IFRS, then to maintain the reliability of information disclosed, the auditor
must ensure that the manager used appropriate and fair professional judgments in the
application of principle-based standards. Besides accounting standards, auditing standards
also play a significant role in determining audit quality. Healy and Palepu (2001) stated that
auditor’s ability in increasing the credibility of financial information is affected by the
difference in several institutional factors such as audit standards, the legal framework that
governs the audit profession, the enforcement of standards and rules and professional
training requirements.
The role of the auditor in increasing the economic consequences of voluntarily disclosed
information is vital. The regulation, standards and market demand may enforce the auditor
to implement the international best practice. By applying the international best practices,
the information for the investor is more credible. This argument reflects that in the better
reporting environment, the effectiveness of the auditor in improving the credibility of
information is increased. The other argument is that in the country with a better reporting Role of audit
environment, auditors face a higher risk of litigation. Therefore, to avoid the risk quality on
of litigation and to maintain their reputation, auditors do the audit in higher quality in market
which will increase the economic consequences of the voluntary information disclosed by
the company.
Based on the above explanation, the second hypothesis is proposed as follow:
H2. The role of the auditor in affecting market consequences of voluntary disclosure in
East Asian countries depends on the level of alignment of accounting and auditing
practice to the international standards.

3. Research method
3.1 Sample selection
In measuring variables related to international accounting and auditing practices, this study
uses data from the CG Watch report 2016 released by the Asian Corporate Governance
Association (ACGA). In the CG Watch report, the assessment of the quality of the
implementation of corporate governance at the country level includes whether accounting
practices in the country are following international best practice. The report covers 11 countries
consisting of Indonesia, Hong Kong, Japan, Taiwan, Thailand, Malaysia, India, Korea, China,
the Philippines and Singapore. Of the 11 countries, this study selects 7 countries as research
objects, namely, India, Indonesia, Japan, Malaysia, the Philippines, Singapore and Thailand. We
include firms that have sufficient market indicators, annual report, auditor and other financial
data for empirical analysis.
This research limits the observation period of 2016. Sample selection criteria are
as follows:
(1) Firms from the non-financial industry – firms from the financial industry are
excluded from the sample because this industry is usually being regulated by
stricter rules and regulations especially in the context of governance and
transparency. Moreover, this study uses several financial variables as control
variables that might not be suitable for the financial industry.
(2) Firms with an accounting period ending on December 31 – to limit the noise effect of
the certain event during the period of the annual report is being published by the
firm, this study limits the sample companies that have the fiscal year of December
31, which most likely release the annual report during February–March.
(3) Firms that publish their annual report on the website and in English – since this
study uses several countries and does the checklist by hand collected, this study
limits the sample that only releases their annual report in English.
(4) Firms with complete data availability.

3.2 Research model

In testing the hypothesis, this research uses several control variables. This research uses
country-level control variables to control the variation in the legal setting across countries
because the difference of legal setting across the country is highly varied in East Asia. This
study uses variable such as rules and regulation, enforcement, political regulation and
average corporate governance quality. In the country with a better legal environment and
higher quality of corporate governance, transparency of information in the capital market
would increase as shown by the decrease of asymmetric information. Kanagaretnam and
Gerald (2007) indicate that corporate governance mechanisms reduce the bid and ask price
ARA spreads changes at the times of earnings announcement. Previous research has also shown
that a better governance system ensures the quality of information. In a better governance
system, the information disclosed is more reliable and relevance for the investor and the
estimation risk decreases (Ajinkya et al., 2005; Karamanou and Vafeas, 2005; Klein, 2002).
Because this study has included several country variables that involve differences in
reporting environments, the model in this study no longer includes country dummy
variables as control variables. Country dummy variables are not included also to avoid the
multicollinearity effect in the model caused by a very high correlation between dummy
country variables with previously explained country control variables.
This research also includes several firm-level variables to control the firm’s
characteristics. This research includes variables such as profitability measured by ROA,
leverage measured by a debt-equity ratio, growth measured by sales growth and firm size
measured by the natural logarithm of market capitalization. Profitability is controlled
because prior studies state that companies that have good performance tend to have higher
voluntary disclosures, and market reactions to voluntary disclosure are also higher. Many
prior studies have reported a positive relationship between profitability and voluntary
disclosure (Luo and Tang, 2014). While Leverage is included as a control variable because
leverage reflects the risk of the debt or default risk (Fan and Wong, 2002). Highly debted
firms are associated with high risk and hence information disclosed by this company will be
responded differently by the market. Furthermore, to control the impact of growth in the
company, this study included variable sales growth. Then this study also controls the
impact of firm size in testing the market consequences of voluntary disclosure. Because this
research is a study that examines the impact of voluntary disclosure on market
consequences, size is measured using natural logarithms of market capitalization. The use
of natural logarithms of market capitalization as a proxy for company size refers to the
research of Fan and Wong (2002) and Botosan (1997). This research also uses several
measurements of market consequences, namely, CAR, price volatility, trading volume and
bid-ask spread. The model to test whether voluntary disclosure has positive market
consequences is as follows:
Marketconsequencesi ¼ b0 þb1 VOLDISCi þb2 AUDDUMi þb3 IGAAPi þb4 CGRULESi

þb5 ENFORCEMENTi þb6 POLITICALREGi þb7 CGQUALi þb8 ROAi

þb9 LEVi þb10 SALESGRi þb11 LNMCi þei : (1)

The expectation of β1 is positively significant for dependent variable of CAR, price volatility,
trading volume and for bid-ask spread model, the expectation is negative because an
increase of VOLDISC level might decrease the bid-ask spread. Furthermore, to test H1 and
H2 this research uses the model presented as follows:
Marketconsequencesi ¼ b0 þ b1 VOLDISCi þb2 AUDDUMi þb3 IGAAPi

þb4 VOLDISCAUDi þ b5 VOLDISCAUDIGAAPi þb6 CGRULESi

þb7 ENFORCEMENTi þb8 POLITICALREGi þ b9 CGQUALi

þb10 ROAi þb11 LEVi þb12 SALESGRi þb13 LNMCi þei : (2)
The expectation sign for H1 is significantly positive for β4, which reflects that higher
market consequences of voluntary disclosure of firm audited by Big 4 accounting firm than
firm audited by non-Big 4. The expectation for β5 above is also positive and represents that
auditor can give more contribution to enhancing market consequences of voluntary
disclosure in countries with the international best practice of financial reporting.
3.3 Operationalization of variable Role of audit
3.3.1 Market consequences variables. This research uses several market consequences quality on
variables. The operationalization of the variables is as follow: market
Cumulative abnormal return (CAR). CAR is the cumulative value of the monthly return
where the monthly return is calculated from the average daily return (working days) for one
month. This study uses the market adjusted return to measure the abnormal return. The
formula of CAR is as follows:
!
X12
1X N
CAR ¼ ðRiRmÞ ;
t¼1
N t¼1

Ri is the daily return of stock i, Rm the daily return of the market, N the number of working
days in a month.
The volatility of return (VOLRET). The volatility of return is the standard deviation of
daily (working days) return during the period of research.
Spread (SPREAD). Spread is calculated using the data of the annual average of daily
(working days) bid-ask spread, following Grüning (2011). The formula is as follows:
 
SPREADit ¼ ðAskit –Bidit Þ= ðAskit þBidit Þ=2 :

Trading volume (TRADVOL). Trading volume is calculated using the average daily trading
volume during the period of research.
In measuring the market consequences, this study uses the period of April 1–March 31.
This period is used because firms usually publish their annual report of no more than three
months after the fiscal year. Since this study limits the sample selection only for firms that
have a fiscal year that ends on December 31, most likely these firms release the annual
report from February to March. This research uses daily trading, in which the daily trading
amount between countries can vary. So, to measure market consequence, this study uses
accumulated value of the monthly average return to calculate CAR, the standard deviation
of daily returns to calculate VOLRET, average daily bid-ask spread to calculate SPREAD
and average daily trading volume to calculate TRADVOL. Using the average and standard
deviation of the data can ensure that the difference in the number of trading days between
countries would not be a problem.
This study does not use event study by using the period around the publication of the
annual report because the information reflected in voluntary disclosure is the company’s
activities carried out during the reporting period. Often the market consequences of the
report cannot be separated between reaction during the report release or from the market
reaction to company activities carried out during the reporting period. Therefore, this study
uses a longer period in measuring market reaction to voluntary disclosure.
3.3.2 Voluntary disclosure (VOLDISC). This research uses annual reports as the basis
for measuring voluntary disclosure. This study developed the checklist based on Botosan
(1997) and Francis et al. (2008). Botosan (1997) measures voluntary disclosure by using five
topics, namely, background information, the summary of historical results, key no-financial
statistic, projected information and management discussion and analysis (MD&A). Francis
et al. (2008) developed a measurement of voluntary disclosures based on Botosan (1997) by
excluding background information and MD&A since this information is already mandatory
by SEC and including other financial measures element. Francis et al. (2008) measured
voluntary disclosure using four elements which are summary of historical results,
non-financial measures, projected information and other financial measures. This research
developed the measurement of voluntary disclosure based on Francis et al. (2008) by
ARA excluding the summary of the historical result and adding several topics such as customer
focus, internal business and learning and growth. This development is done to make sure
that voluntary disclosure represents voluntary information in nature. Most of the
components in summary of the historical result as in Francis et al. (2008) are quite common
financial performance indicators such as return on asset, net profit margin, asset turns over
and return on equity. This information, in general, is required to be disclosed or if not,
already disclosed by most of the company so that the variability of the data is very low. On
the other hand, information, such as customer focus, internal business and learning and
growth, provides more voluntary information that is relevant for decision making.
Thus, this study measures the voluntary disclosure by using nine groups of topics,
namely: customer focus (13 questions); internal business (17 questions); learning and growth
(11 questions); asset utilization (4 questions); cost reduction (9 questions); revenue growth (3
questions); projected information (4 questions); other financial measurements (11 questions);
and non-financial measurements (7 questions). The total questions in the checklist are
79 questions. Table AI presents the complete checklist to measure VOLDISC.
This study focuses on whether the company discloses specific information as voluntary
disclosures or not. So, to measure the voluntary disclosure, this study uses score 1 if the
company discloses information in the checklist and 0 if the company does not disclose the
information. This study does not use different weight for each topic since there is no
theoretical support to give different weight for each topic. This study uses content analysis
to measure voluntary disclosures using NVIVO. The formula to measure the voluntary
disclosure is as follow:

1X n
Total Score of Topic k
VOLDISCk ¼ :
9 k¼1 Maximum Score for Topic k

The above formula shows that the voluntary disclosure is the average of the score in each
indicator. For the company that has non-applicable information (e.g. if the company does not
have R&D, then the disclosure that relates to R&D is not applicable), the study modified the
maximum score and did not include the non-applicable items in the measure of the
voluntary disclosure.
3.3.3 Audit quality (AUDDUM). This variable measures the audit quality by using the
size of the audit firm. The big size audit firm is perceived by investors to perform better
audit quality because of the greater resources that they possess and the reputation that they
have to maintain. This variable is measured by using a dummy variable; point 1 for the
company audited by Big 4, whereas value 0 for the company audited by non-Big 4. Big 4
accounting firms are public accounting firm that has an affiliation with Ernst & Young,
Pricewaterhouse Cooper, Deloitte and KPMG.
3.3.4 IGAAP. The IGAAP variable measures the country-level score of accounting and
auditing practices. This research not only focuses on the adaptation of international
accounting standards, but also on the alignment with international best practice in auditing.
To measure IGAAP, this research uses CG Watch report 2016 released by the ACGA. The
questions to measure IGAAP are as follow:
(1) Does the country’s government or regulator have the policy to adopt or follow
international accounting standards (e.g. IFRS)?
(2) If not, are local accounting standards in line with international standards?
(3) Are large companies have accounting policies and practice that in line with
international standards and best practice?
 (4) Are small- and medium-sized companies have accounting policies and practice that Role of audit
in line with international standards and best practice? quality on
(5) Is there any rules or regulation that require disclosure of consolidated accounts? market
(6) Is there any rules or regulation that require detailed segment reporting?
(7) Is there any requirement to disclose information on audit and non-audit fee paid to
the external auditor required, with accompanying commentary?
(8) Does the country’s government or regulator have the policy to adopt or follow ISA?
(9) If not, are local auditing standards in line with international standards?
(10) Are large companies must be audited based on auditing practice that in line with
international best practice?
(11) Are small- and medium-sized companies must be audited based on auditing practice
that in line with international best practice?
(12) Does the government or the audit regulator actively implement new international
best practice on the independence of external auditors?
(13) Does the government have rules or regulation that strengthened the auditing
profession?
(14) Does the audit regulator exercise effect disciplinary control over the audit profession?
(15) Is the expensing of share-based payments mandatory?
CG Watch Report 2016 already scored countries based on above questions using the
following scale: yes (point of 1); largely (point of 0.75); somewhat (point of 0.5); marginally
(point of 0.25); and no (point of 0).
3.3.5 Interaction variables. To test the moderation role of audit quality on the
relationship between voluntary disclosure and market consequences this study uses
VOLDISCAUD as an interaction variable between voluntary disclosure (VOLDISC) and
audit quality (AUDDUM). Moreover, to test whether the role of audit quality in the market
consequences of voluntary disclosure is different between countries based on the quality of
accounting and auditing practices this study uses variable VOLDISCAUDIGAAP. This
variable is the interaction variable between VOLDISC, AUDDUM and IGAAP.
3.3.6 Control variables. This research uses several control variables, which are:
• CGRULES: measures how well are the rules and regulations in a country;
• ENFORCEMENT: measures how well is the enforcement practice of rules and
regulations in a country;
• POLITICALREG: measures how effective is the political and regulatory system
governing the securities market in a country; and
• CGQUAL: is an average score of the quality of corporate governance implementation
from firms in a country.
The values of CGRULES, ENFORCEMENT, POLITICALREG and CGQUAL are based on
the result from the CG Watch report 2016 released by the ACGA:
• ROA: the ratio of net income to the total asset;
• LEV: the ratio of debt to equity;
• SALEGR: the growth of sales between period t−1 to t; and
• LNMC: natural logarithm of market capitalization.
ARA 4. Result
4.1 Statistic descriptive
Based on the sample selection criteria, Table I provides information about the sample used
in this study.
Table I shows that this study covers 231 firms from Indonesia, 623 firms from India, 567
firms from Japan, 377 firms from Malaysia, 88 firms from the Philippines, 145 firms from
Singapore and 121 firms from Thailand. The overall 2,152 firms included in the sample
covers 17.67 percent of total public companies in these countries. The percentage of
coverage of this research is relatively small because of the relatively large amount of data
that are not available, especially the annual report data. The smallest percentage of samples
included in this study was from India, Japan and Thailand. The low percentage of coverage
in these countries is because many companies in these countries do not have the complete
data needed in this research. Nevertheless, compared to the population, the sample covers
43.22 percent of the market capitalization.
Table I also presents the descriptive statistic of voluntary disclosure broken down by
countries. The table shows that overall the voluntary disclosure level of the sample company
is 58 percent out of 100 percent. This value indicates that on average the voluntary disclosure
rate is not too high. The distribution of voluntary disclosure scorers between countries shows
that the variation of the level of voluntary disclosure is relatively low across countries. Firms
from India and Japan on average have a moderately higher voluntary disclosure level
compare to firms in other countries in the sample. Based on voluntary disclosure scores
per topic, Table I shows that disclosure regarding asset utilization has the lowest average
value of 33 percent and revenue growth has the highest score of 82 percent. Other disclosure
of financial measurement also has a relatively high value of 71 percent. The companies seem
to still focus on disclosures related to financial performance.
The descriptive statistics of the variables can be seen in Table II. From Table II, we can
see that the variety of market indicators represented by variables CAR, volatility of return,
spread and the trading volume is large. The range of CAR is from −1.204 to 1.539 with the
average value of 0.065. The volatility of return ranges from 0.006 to 0.094 with an average of
0.023. Spread ranges from −0.002 to 0.091 with an average of 0.012. The highest variability
can be seen from the trading volume variable with the lowest trading volume 0.000 to the
highest trading volume 134.496 with an average of 21.063. The result shows that the
variability of the market indicator from the seven countries is high.
Voluntary disclosure also shows high variability. The lowest disclosure (out of 1) is 0.25,
and the highest is 0.961, and the average is 0.584. Based on the data presented in Table II,
the sample shows a higher proportion of companies that are audited by the Big 4 accounting
firms. The Big 4 accounting firm audits 72.8 percent of the companies, whereas 27.2 percent
are audited by non-Big 4.
Table III shows the mean values for research variables across countries. Based on the
table it can be seen that Thailand and the Philippines have the highest CAR and VOLRET
values among the seven countries sampled, and the Philippines and Singapore own the
highest SPREAD and Thailand and Indonesia own the highest TRADVOL. For variable
VOLDISC, India and Japan have the highest score, and the Philippines has the lowest score,
and surprisingly Singapore has a low score slightly above the Philippines. The interesting
findings from Table III are that Singapore has the highest institutional reporting
environment that is shown from the highest levels of IGAAP, CGRULES, ENFORCEMENT,
POLITICALREG and CGQUAL. Singapore also has a large proportion of companies audited
by KAP 4, which is 84.6 percent, slightly below Thailand, which has a proportion of
87.8 percent. This shows that the reporting environment in Singapore is good. On the other
hand, on average companies in Singapore do not have a high score of voluntary disclosure,
compared to other countries. This may indicate that companies in Singapore are more
 Descriptive statistic of voluntary disclosure (in % out of 100%)
Country Tot. listed firms Num. of sample % of number sample % of market capitalization Mean SD 1 2 3 4 5 6 7 8 9

Indonesia 537 231 43.02 78.23 56 11 53 68 53 33 36 86 30 72 57

India 5,820 623 10.70 31.42 61 16 56 68 56 45 42 85 67 72 57
Japan 3,535 567 16.04 37.98 60 13 57 67 55 30 40 75 68 67 52
Malaysia 893 377 42.33 79.87 56 13 54 64 52 30 36 85 48 70 55
The Philippines 262 88 33.59 51.63 52 12 50 65 2 31 32 74 42 74 49
Singapore 479 145 30.27 66.63 53 9 49 67 43 25 30 83 58 72 54
Thailand 656 121 18.45 41.75 59 14 61 71 49 39 34 86 36 72 56
All 12,182 2,152 17.67 43.22 58 13 54 67 50 33 36 82 50 71 54
Notes: Voluntary disclosure is consist of nine topics, the topics are as follow: 1 – customer focus; 2 – internal business; 3 – learning and growth; 4 – asset utilization;
5 – cost reduction; 6 – revenue growth; 7 – projected information; 8 – other financial measurements; 9 – non-financial measurements
market
quality on
Role of audit

Table I.
Sample
ARA Variable Mean SD Q1 Median Q4 Min. Max.

CAR 0.065 0.302 −0.111 0.049 1.539 −1.204 1.539

VOLRET 0.023 0.016 0.014 0.018 0.094 0.006 0.094
SPREAD 0.012 0.019 0.002 0.005 0.091 −0.002 0.091
TRADVOL 21.063 33.636 1.197 5.783 134.496 0.000 134.496
VOLDISC 0.584 0.136 0.500 0.566 0.961 0.250 0.961
AUDDUM 0.728 0.446 0.000 1.000 1.000 0.000 1.000
IGAAP 75.427 6.806 75.000 75.000 88.000 63.000 88.000
CGRULES 48.645 6.969 45.000 46.000 65.000 35.000 65.000
ENFORCEMENT 45.803 11.074 38.000 53.000 60.000 15.000 60.000
POLITICALREG 59.281 7.337 54.000 62.000 69.000 33.000 69.000
CGQUAL 53.950 3.479 53.000 53.000 61.000 41.000 61.000
LEV 0.604 0.735 0.053 0.359 3.256 −0.687 3.256
ROA 0.100 0.418 0.019 0.046 3.464 −2.519 3.464
Table II. SALESGR 0.095 0.222 −0.019 0.074 0.961 −0.674 0.961
Descriptive statistic of LNMC 16.885 3.103 14.122 17.588 25.559 10.962 25.559
the variable n 2,152

focused on mandatory disclosure so that they comply with existing regulations, considering
the high enforcement power of regulations.
Table IV shows the correlation between variables. Based on Table IV it can be seen that
voluntary disclosure correlates positively with market consequence variables, where
VOLDISC is positively correlated with CAR, VOLRET and TRADVOL and is negatively
correlated with SPREAD. Moreover, the dummy variable of Big 4 shows that AUDDUM has
a positive correlation with CAR, VOLRET and TRADVOL and is negatively correlated with
SPREAD. These results indicate that voluntary disclosure and audit quality are positively
correlated with market consequences. Table IV also shows the correlation between
independent variables. Based on the table, there is a high correlation between political
regulation and enforcement, and between CG quality and CG rules which are 0.702 and
0.736, respectively. Correlations between independent variables can be an initial indication
of multicollinearity in which this issue is to be tested further using variance inflation factors
(VIF) when regression testing is performed.

4.2 Regression results

Table V shows the regression result of Model 1. The probabilities of F-test from all models are
all above 1 percent. The R2 of Model 1 is ranging from 8.7 to 83.8 percent. The result of
multicollinearity test shows that the VIF value for all the variables is below 10 and mean of VIF
is 2.76. Hair et al. (1995) explained that the level of VIF should less than 10, so the regression
coefficient results do not indicate a poor estimate caused by multicollinearity problems.
The result of Model 1 shows that voluntary disclosure gives positive consequences
significantly to the market by increasing the CAR, volatility of return and average trading
volume, and decreasing asymmetric information. The results conclude that if the firm
disclosed complete information or the higher the level of voluntary disclosures, the market
shows positive responses or the consequences of voluntary disclosure in the capital market
are positive. The results show that voluntary disclosure has positive market consequences in
East Asian countries, consistent with Botosan (1997) and Bloomfield and Wilks (2000). Cheng
et al. (2006) and Jiang et al. (2010) also point out that the broader the voluntary disclosure
made, the smaller the asymmetry of information between companies and investors.
The result in Table V also shows that market consequences are positive on audit quality
and the adoption of international accounting and auditing practices. These results indicate
that when the company chooses the Big 4 accounting firm, the market reacts positively.
 CAR VOLRET SPREAD TRADVOL VOLDISC AUDDUM IGAAP CGRULES ENFORCEMENT POLITICALREG CGQUAL LEV ROA SALESGR LNMC

India
Average −0.026 0.020 0.001 19.255 0.611 0.307 63.000 46.000 36.000 54.000 53.000 0.939 0.086 0.153 18.26857
SD 0.275 0.004 0.001 31.667 0.161 0.464 – – – – – 0.985 0.083 0.229 1.269077

Indonesia
Average 0.091 0.026 0.019 70.030 0.559 0.700 67.000 39.000 15.000 33.000 41.000 0.517 0.124 0.131 22.81136
SD 0.454 0.008 0.022 72.746 0.108 0.470 – – – – – 0.505 0.120 0.173 1.58299

Japan
Average 0.078 0.015 0.005 23.008 0.603 0.813 75.000 45.000 53.000 62.000 53.000 0.635 0.027 0.086 18.79851
SD 0.231 0.004 0.014 48.529 0.135 0.391 – – – – – 0.748 0.054 0.184 1.463361

Malaysia
Average 0.036 0.020 0.018 8.316 0.560 0.701 80.000 49.000 38.000 60.000 54.000 0.468 0.070 0.126 13.24083
SD 0.296 0.009 0.016 17.421 0.132 0.460 – – – – – 0.658 0.089 0.247 1.269895

The Philippines
Average 0.342 0.068 0.029 31.941 0.526 0.800 75.000 35.000 15.000 37.000 54.000 0.717 0.102 0.234 16.86953
SD 0.417 0.004 0.033 35.485 0.126 0.422 – – – – – 0.763 0.086 0.421 2.731336

Singapore
Average 0.033 0.025 0.025 21.871 0.539 0.846 88.000 65.000 60.000 69.000 58.000 0.395 0.431 −0.071 12.78877
SD 0.359 0.013 0.022 34.772 0.094 0.364 – – – – – 0.432 1.158 0.181 1.459062

Thailand
Average 0.201 0.067 0.018 81.357 0.588 0.878 73.000 56.000 42.000 54.000 61.000 0.502 0.086 0.163 16.26512
SD 0.422 0.005 0.025 170.592 0.142 0.331 – – – – – 0.576 0.076 0.218 1.216587
market
quality on

Average value of
Role of audit

variables across
countries
Table III.
 ARA

Table IV.
Correlation
between variables
VAR CAR VOLRET SPREAD TRADVOL VOLDISC AUDDUM IGAAP CGRULES ENFORCEMENT POLITICALREG CGQUAL LEV ROA SALESGR LNMC

CAR 1
VOLRET 0.224*** 1
SPREAD 0.010 0.374*** 1
TRADVOL 0.127*** .213*** −0.062 1
VOLDISC 0.067** 0.068* −0.166*** 0.075* 1
AUDDUM 0.138*** 0.015** −0.028* 0.104** −0.008 1
IGAAP 0.720** −0.137** 0.311*** 0.102** 0.142*** 0.271*** 1
CGRULES −0.325* 0.241*** 0.269*** −0.019 −0.108** 0.101** 0.656*** 1
ENFORCEMENT 0.120* 0.302*** −0.069 0.141* 0.031 0.202*** 0.520*** 0.452*** 1
POLITICALREG −0.067 −0.374*** −0.007* −0.237*** −0.006 0.143*** 0.647*** 0.546*** 0.702*** 1
CGQUAL 0.047** 0.455*** −0.149*** −0.079* −0.041 0.107** 0.439*** 0.736*** 0.448*** 0.534*** 1
LEV −0.014 0.040 0.063 0.152*** 0.093** −0.047 −0.183*** −0.121*** −0.056 −0.069 −0.064 1
ROA 0.089** 0.163** −0.075* 0.085* −0.042 0.069 0.173*** 0.252*** 0.078* 0.090** 0.117*** −0.093** 1
SALESGR 0.166*** 0.074* −0.099** 0.076* 0.098** −0.009 −0.224*** −0.217*** −0.229*** −0.217*** −0.083** 0.031 0.058 1
LNMC 0.062 0.204*** −0.439*** 0.238*** 0.198*** 0.031 −0.632*** −0.629*** −0.095** −0.396*** −0.542*** 0.069* −0.032 0.158*** 1
Notes: *,**,***Significant at the 10, 5 and 1 percent of levels, respectively
Dependent variables CAR VOLRET SPREADYR AVVOL
Independent variables Exp. sign Coeff. Sign. Exp. sign Coeff Sign. Exp. sign Coeff. Sign. Exp. sign Coeff. Sign. VIF

VOLDISC + 0.137 0.075* + 0.001 0.014** − −0.009 0.100* + 9.852 0.098* 1.07
AUDDUM + 0.059 0.032** + 0.001 0.063* − −0.001 0.068* + 1.954 0.233 1.22
IGAAP + 0.008 0.003*** + 0.000 0.000*** − 0.001 0.000*** + 0.404 0.102 2.74
CGRULES + −0.007 0.029** + −0.000 0.144 − 0.000 0.096* + 1.329 0.000*** 3.48
ENFORCEMENT + 0.006 0.007*** + 0.000 0.000*** − 0.000 0.210 + 0.973 0.000*** 6.29
POLITICALREG + −0.017 0.001*** + −0.003 0.000*** − −0.001 0.000*** + −2.635 0.000*** 8.23
CGQUAL + 0.017 0.015** + 0.004 0.000*** − 0.000 0.376 + −0.386 0.330 2.54
ROA + 0.059 0.038** + −0.003 0.003*** − −0.003 0.007*** + −2.185 0.271 1.17
LEV + 0.000 0.499 + 0.001 0.000*** − 0.000 0.449 + 14.618 0.000*** 1.05
SALESGR + 0.196 0.055* + 0.002 0.087* − 0.000 0.425 + 1.318 0.426 1.14
LNMC + 0.000 0.457 + 0.001 0.000*** − −0.004 0.000*** + 8.405 0.000*** 1.38
CONS −0.593 0.075* −0.055 0.000*** 0.060 0.005*** −120.316 0.014**
F-test 0.000 0.0000 0.0000 0.0000 Mean VIF ¼ 2.76
Adj. R2 0.087 0.838 0.333 0.330
n 2,152 2,152 2,152 2,152
Notes: *,**,***Significant at the 10, 5 and 1 percent of levels, respectively
market
quality on
Role of audit

Model 1
Regression result of
Table V.
ARA It is implied that market confidence in public accounting firms affiliated with the Big 4. The
market has a perception that the Big 4 accounting firm has better quality than non-Big 4.
The results also show that when a country adopts international financial reporting best
practice, the market also reacts positively, reflected in increasing CAR, volatility of return
and average trading volume.
An interesting result from the variable market consequences is measured by spread. The
result shows a positive link between IGAAP and spread, which means that the international
financial reporting best practice increases information asymmetry. An alternative
explanation of the result is that the IFRS that uses principal-based approach and more
normative professional guideline for auditors might increase information asymmetry. As a
result, the information asymmetry is higher because a group of investor might interpret the
information being disclosed differently from another group because they have a different
perception in analyzing the information disclosed by the firm.
Table VI shows the regression result of Model 2. The probabilities of the F-test from all
models are all above 1 percent. The R2 of Model 1 is ranging from 9.0 to 84.3 percent. Since
Model 2 uses several interaction variables, multicollinearity problems arise. This study uses
centering technique to overcome the multicollinearity problems. Multicollinearity problems
often appear naturally in research models that use interaction variables because of the
multiplication factor between the same variables. The centering technique is explained in
the note of Table VI. After the centering treatment, the results of multicollinearity tests
show that the VIF for each of the variables are also below 10.
Table VI presents the result for H1 that states positive market consequences of
voluntary disclosure in East Asian countries are higher for firm audited by Big 4 accounting
firms than firm audited by non-Big 4. The results show that, in general, the hypothesis is
supported. The results show that Big 4 auditor strengthens the positive effect of voluntary
disclosure on the CAR, volatility of return (VOLRET) and average trading volume
(TRADVOL). The results imply that auditor plays a significant role in increasing the
credibility of voluntary information by increasing the market consequences of voluntary
disclosure. This result is also consistent with previous literature that shows evidence of the
role of the auditor in increasing economic consequences of earnings number. Lang and
McNichols (1990) state that greater conformance of the financial report with GAAP assured
when high-quality auditors audited the financial report. Therefore, the predictability of
earnings increases with high-quality auditors.
Moreover, the higher conformance of earnings number and value of the firm can be seen
by the reported number that accurately reflects economic value (Teoh, 1992b). The results
show that the effect of VOLDISCAUD on SPREADYR is not significant. The result shows
that the effect of voluntary disclosure on asymmetric information measured by spread is not
different between Big 4 and non-Big 4.
Table VI also shows the result of the test for H2. The result indicates that in general, higher
alignment of accounting and auditing practices in one country can escalate auditor’s role in
increasing the economic consequences of voluntary disclosure. The hypothesis is supported
by three out of four measurements of market consequences which are CAR, VOLRET and
AVVOL. This evidence shows that the role of the auditor in increasing the effect of voluntary
disclosure, by increasing CAR, VOLRET and AVVOL, is higher in a country that adopts
international best practice in financial reporting. These results support the argument that with
a better reporting environment, the effectiveness of the auditor in increasing the credibility of
information is increased. The results are consistent with Healy and Palepu (2001) that state
that auditor can increase the credibility of financial information depending on the institutional
factors such as standards for auditing, the regulatory framework that governs the audit
profession, the enforcement of accounting and auditing standards and rules, and training
requirements for accounting and auditing professional. The results show that the effect of
Dependent variables CAR VOLRET SPREADYR AVVOL
Independent variables Exp. sign Coeff. Sign. Exp. sign Coeff. Sign. Exp. sign Coeff. Sign. Exp. sign Coeff. Sign. VIFa

VOLDISC + 0.319 0.019** + 0.004 0.092* − −0.005 0.086* + −2.184 0.042** 3.58
AUDDUM + 0.208 0.033** + 0.004 0.025** − −0.001 0.040** + 6.195 0.025** 1.24
IGAAP + 0.008 0.010** + 0.000 0.000*** − 0.001 0.000*** + 0.826 0.007*** 3.72
VOLDISCAUD + 0.278 0.027** + 0.047 0.003*** − 0.032 0.127 + 118.645 0.019** 3.52
VOLDISCAUDIGAAP + 0.000 0.088* + 0.000 0.014** − −0.000 0.121 + 1.689 0.013** 2.78
CGRULES + −0.007 0.031** + −0.000 0.335 − 0.000 0.074* + 1.501 0.000*** 3.67
ENFORCEMENT + 0.006 0.007*** + 0.000 0.000*** − 0.000 0.260 + 0.873 0.000*** 6.43
POLITICALREG + −0.017 0.002*** + −0.003 0.000*** − −0.001 0.000*** + −2.437 0.000*** 8.49
CGQUAL + 0.017 0.014** + 0.004 0.000*** − 0.000 0.412 + −0.531 0.274 2.57
ROA + 0.057 0.044** + −0.002 0.003*** − −0.003 0.012** + −1.489 0.349 1.19
LEV + −0.000 0.492 + 0.001 0.000*** − 0.000 0.408 + 14.944 0.000*** 1.06
SALESGR + 0.194 0.005*** + 0.002 0.107 − 0.000 0.444 + 0.532 0.469 1.15
LNMC + 0.001 0.412 + 0.001 0.000*** − −0.004 0.000*** + 8.353 0.000*** 1.39
CONS −0.741 0.056** −0.063 0.000*** 0.051 0.013** −162.177 0.001***
F-test 0.000 0.000 0.000 0.000 Mean VIF ¼ 3.14
Adj. R2 0.090 0.843 0.335 0.338
n 2,152 2,152 2,152 2,152
Notes: aVIF value in testing Model 2 was obtained after centering treatment to overcome multicollinearity problems caused by several interaction variables. Before
centering treatment, VIF in the VOLDISCAUD and VOLDISCAUDIGAAP variables were 158.32 and 155.97. The centering process was conducted on the VOLDISCAUD
variable by multiplying the VOLDISC variable that has been reduced by its average value with the AUDDUM variable, while in the VOLDISCAUDIGAAP variable the
centering process was conducted by multiplying the VOLDISC, AUDDUM and IGAAP that has been reduced by their average values. With this centering technique the
problem of multicollinearity can be overcome (as shown in the last column of this table). *,**,***Significant at the 10, 5 and 1 percent of levels, respectively
market
quality on
Role of audit

Model 2
Regression result
Table VI.
ARA VOLDISCAUDIGAAP on SPREADYR is also not significant. The results indicate that the
accounting and auditing best practices do not affect the relationship between auditor and
market consequences of voluntary disclosure measured by the spread. Taken together on the
results, the insignificant effect of VOLDISCAUD and VOLDISCAUDIGAAP on spread may
reflect that the auditor’s role and international best practice in accounting and auditing cannot
reduce further information asymmetry when the company has issued voluntary disclosure.
The data shows that the majority of sample companies (72.8%) are audited by Big 4 audit
firms. Low variation of auditor data can cause insignificant influence on the economic
consequences of voluntary disclosure as measured by spreads. Furthermore, with most
companies audited by Big 4 audit firms, the existence of accounting and auditing practices
that refer to international best practices cannot increase the economic consequences of
voluntary disclosure, because the auditors used by companies are bound to international audit
standards given that most the auditor is Big 4. Therefore, accounting and audit practices that
refer to international best practices at the country level is not significant.
Test results for control variables are shown in Tables V and VI. The results show relatively
consistent results. Based on the test results, this study shows that some country-level control
variables that support a company’s reporting environment generally has a significant effect on
the market variables. The results show that the CG rules negatively impact CAR and have a
positive impact on spread and trading volume. The result also shows that the impact of CG
rules on volatility of return is not significant. Enforcement, in general, has a positive effect on
market consequence variables where better enforcement in a country will increase CAR,
volatility of return and trading volume. However, the effect of enforcement on spread is not
significant. The interesting results are shown by the variable political regulations which based
on the results of the tests show a negative influence on market consequences. CG rules reduce
CAR, volatility of return, spread and trading volume. CG quality is only significant on two out
of three variables, whereas it positively affects CAR and volatility of return.
As for the results of research related to firm-level control variables, this study shows that the
market reacts significantly to the company’s performance reflected by the ROA variable, the
effect of ROA on CAR is positive, and the effect of ROA on volatility of return and spread is
negative. Leverage and sales growth significantly affect two of the four market consequence
variables. Leverage has a significant positive effect on volatility of return and trading volume,
while sales growth has a significant positive effect on CAR and volatility of return. Natural
logarithms of market capitalization, LNMC, as a proxy for company size, generally have a
positive effect on market consequence variables. LNMC positively affects the volatility of return
and trading volume and negatively affects spread. The effect of LNMC on CAR is not significant.

5. Conclusion
This paper aims to investigate the auditor’s role in increasing the market consequences of
voluntary disclosure in the different context of accounting and auditing practices. This
study uses East Asia as the study setting, represented by seven East Asian countries,
namely: India, Indonesia, Japan, Malaysia, The Philippines, Singapore and Thailand. These
countries are chosen because of the different characteristics among them in terms of the
implementation of international accounting and auditing practices. Cross-country analysis
used in this study comprehends the context of the auditor role in increasing the market
consequences of voluntary disclosure.
Using 2,152 samples from seven countries in East Asia, this research shows several
empirical findings. First, this study shows that voluntary disclosure gives significant
positive consequences to the market by increasing the CAR, volatility of return and average
trading volume, and decreasing asymmetric information. Second, the results show that, in
general, auditor plays a significant role in enhancing the credibility of voluntarily disclosed
information by increasing the market consequences of increased disclosure. The results
show that Big 4 auditor strengthens the positive effect of voluntary disclosure on the CAR, Role of audit
volatility of return (VOLRET) and average trading volume (TRADVOL). Third, the result quality on
shows that the role of the auditor in increasing the effect of voluntary disclosure, by market
increasing CAR, VOLRET and AVVOL, is higher in a country that adopts international best
practice in financial reporting. These results support the argument that with a better
reporting environment, the effectiveness of the auditor in increasing the credibility of
information is enhancing. Fourth, the effects of the interaction variable between voluntary
disclosure and auditor dummy variable of Big 4 and non-Big 4 (VOLDISCAUD) and three-
way interaction variable between voluntary disclosure, auditor dummy variable and IGAAP
(VOLDISCAUDIGAAP) on spread are not significant. These results may reflect that the
auditor’s role and international best practice in accounting and auditing cannot reduce
further information asymmetry when the company has issued voluntary disclosure.
This study provides several implications for knowledge and practice. First, this study
shows that in a reporting environment that is less transparent as in the conditions of
countries in East Asia, voluntary disclosure and the role of the auditor in increasing value of
voluntary disclosure for market participants are essential. The practical implication is that
companies need to increase their voluntary disclosures to become additional provisions in
improving their reporting environment and consider the result of this study when choosing
the auditor. Second, audit quality is more important in increasing the credibility of
voluntary disclosure in countries that adopt international best practices in financial
reporting. It implies that audit quality is a complementary mechanism of the reporting
environment. Third, to extend previous research, this study provides implication to future
research by providing more comprehensive measurement of voluntary disclosure.
Several limitations are to be noted from this research. First, this study developed the
measurement of voluntary disclosure and measure voluntary disclosure using content
analysis. Although the measurement used in this study is relatively more complete
compared to previous research, there is still much voluntary disclosure information that is
not included in the checklist. Moreover, this study only considers voluntary disclosure in the
annual report. Therefore, the future study can develop a more comprehensive measurement
of voluntary disclosure and use sources of information beyond the annual report. Second,
this research uses the measurement of audit quality using the dummy variables of Big 4 and
non-Big 4. Previous literature has already criticized this measurement. This measurement
might not capture real audit quality.
Third, the number used as a sample of this study may not be able to represent most
companies listed in the stock exchange in seven countries, due to the limitation in check-listing
the voluntary disclosure measurement. Moreover, regarding the sample, there is a probability of
self-selection bias since the companies that are audited by Big 4 might have different
characteristics compared to other companies, and not all the characteristics are controlled in this
study. Fourth, this study does not control for industry differences in examining the effect of
voluntary disclosure and the role of auditor and accounting and auditing practices on the market
consequences. The result might be different across industries. Next research should consider to
control industry differences or examine different effect across industries. At last, this study also
has a limitation in measuring the market consequences of voluntary disclosure. This study
measures market consequences using measurement during the research period, not the period
that surrounds the event of annual report releases. Future study can also use event study in
testing the market consequences of voluntary disclosure. In using event study, future research
can identify the specific date of company reporting and measure market consequences around
the reporting date. This study also assumes that the publication of the company’s annual report
is carried out before April, so that the measurement period of the market consequences used is
April 1–March 31. Further research can consider different periods between countries by
considering the requirement for submitting annual reports based on regulations in that country.
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ARA Appendix

Customer focus
1 Does the company mention about their strategy to maintain on-time delivery to the customer?
2 Does the company have a strategy or way to maintain or achieve a certain level of product quality
(e.g. product certification, or award in product quality)?
3 Does the company have a program(s) in which ensure the product safety?
4 Does the company offer product customization to the clients?
5 Does the company disclose its pricing strategy or disclose any information regarding their pricing to the
customer?
6 Is there any customer survey?
7 Is there any after sale service?
8 Does the company provide mechanisms for a complaint to the customer (e.g. customer service call center,
help desk, contact via e-mail, etc.)?
9 Is there any disclosure about repeat order?
10 Does the company disclose information about customer satisfaction (e.g. the result of the survey, award,
testimony of customer, etc.)?
11 Does the company disclose its brand development?
12 Does the company disclose its corporate value and image?
13 Does the company mention about their productivity?
Internal business
14 Does the company disclose its product development activity?
15 Does the company disclose information about their inventory system?
16 Does the company disclose information about their distribution system?
17 Does the company disclose information about their capacity management?
18 Does the company disclose information about its process improvement?
19 Does the company disclose information about their competitor and how they handle the competition?
20 Does the company disclose information about their corporate event?
21 Does the company disclose information about outsourcing activity?
22 Does the company disclose about how they manage their supplier relationship?
23 Does the company disclose information about service responsiveness?
24 Does the company disclose information about their diversification in geographic/ customer/ product?
25 Is there any activity relating to research and development?
26 Is there any new concept implemented in the company?
27 Does the company have increased in market share?
28 Does the company have business to business agreements with other parties?
29 Does the company have a work safety program?
30 Does the company have an internship program?
Learning and growth
31 Does the company disclose information about the total hour of training?
32 Does the company disclose information about carrier development?
33 Does the company disclose information about pension plan and salary (apart from disclosure about the
total compensation of directors)?
34 Does the company disclose information about employee turnover?
35 Does the company disclose information about the information system?
36 Does the company disclose information about labor union, employee satisfaction, gathering, industrial
relationship?
37 Does the company disclose information about their way to improve (or maintain) employee welfare?
38 Does the company disclose information about its way to ensure equality?
39 Does the company disclose information about their way to make sure the employee involvement?
40 Does the company disclose information about the minimum salary or the minimum wages?
41 Does the company disclose information about the number of employees?
Table AI.
Checklist item of
voluntary disclosure (continued )
Asset utilization
Role of audit
42 Does the company disclose information about (or sufficient information to measure) asset quality on
utilization ratio? market
43 Does the company disclose (or sufficient information to measure) average capital employed and provide
analysis on it?
44 Does the company disclose information about (or sufficient information to measure) ratio COGS
to inventory?
45 Does the company disclose information about (or sufficient information to measure) ratio AR to sales?
Cost reduction
46 Does the company disclose information about the cost efficiency program?
47 Does the company disclose information about (or sufficient information to measure) operating
cost per employee?
48 Does the company disclose information about (or sufficient information to measure) Ratio sales
per employee?
49 Does the company disclose information about (or sufficient information to measure) analysis trend
operating expenses?
50 Does the company disclose information about (or sufficient information to measure) trend of operating
expenses compared to the competitor?
51 Does the company disclose information about (or sufficient information to measure) ratio R&D expenses
to sales?
52 Does the company disclose information about (or sufficient information to measure) ratio operating
expense to sales?
53 Does the company disclose information about (or sufficient information to measure) ratio indirect
expense to sales?
54 Does the company disclose information about (or sufficient information to measure) average
compensation per employee?
Revenue growth
55 Does the company disclose information about customer and product line productivity?
56 Does the company disclose information about (or sufficient information to measure) growth in unit sold
(quantity)?
57 Does the company disclose information about future performance (growth) target?
Projected information
58 Does the company disclose information about the forecasted market share?
59 Does the company disclose information about the cash flow forecast?
60 Does the company disclose information about the profit forecast?
61 Does the company disclose information about the sales forecast?
Other financial measurement
62 Does the company disclose information about asset disposal and impairment?
63 Does the company provide analysis on the capital expenditures?
64 Does the company provide information about CF history (e.g. trend)?
65 Does the company provide information about the exchange rate/interest rate fluctuation risk?
66 Does the company disclose information about the operating segment?
67 Does the company disclose information about (or sufficient information to measure) growth in
price per share?
68 Does the company disclose information about (or sufficient information to measure) growth in book value
per share?
69 Does the company disclose information about (or sufficient information to measure) growth in market
capitalization?
70 Does the company provide information about cash flow analysis?
71 Does the company disclose information about asset commitment?
72 Does the company disclose information about free cash flow (or cash flow other than that reported in the
statement of cash flows)

(continued ) Table AI.

ARA
Non-financial measurement
73 Does the company disclose information about non-financial performance (e.g. economic profit, residual
income)?
74 Does the company disclose information about the cost of capital?
75 Does the company disclose information about the percentage of sales or services designed or introduced
in the past 3–5 years?
76 Does the company disclose information about how to increase or maintain market share?
77 Does the company disclose information about how many units sold (or other output measures,
e.g. production, customers serviced)?
78 Does the company disclose information about how much the unit selling price (or other price measures,
e.g. hourly rate)?
79 Does the company disclose information about growth in investment (expansion plans, number of
Table AI. outlets, etc.)?

Corresponding author
Ratna Wardhani can be contacted at: [email protected]

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