Audit Quality Perceptions and Capital Market Confidence Effects

Abstract

This research investigates the underexplored cognitive and behavioral mechanisms
through which perceptions of audit quality, distinct from objective quality measures,
influence capital market confidence. Moving beyond traditional archival studies linking
audit firm size or fees to market outcomes, we propose a novel theoretical framework integrating signal processing theory from information science with institutional trust constructs from sociology. We conceptualize the audit report not merely as an information
signal but as a complex trust anchor, whose interpretation by market participants is mediated by perceptual filters shaped by narrative disclosures, media sentiment, and the
auditor’s communicative persona. The methodology employs a hybrid computationalempirical approach, combining natural language processing of audit report narratives
and related financial news from 1998-2004 with an experimental asset market simulation. We analyze linguistic features—such as certainty tone, explanatory depth, and
rhetorical complexity—to construct a Perceived Assurance Strength (PAS) index. This
index is then used as a treatment variable in controlled market simulations with professional analysts. Our results reveal a non-linear, threshold-dependent relationship
between PAS scores and trading confidence metrics, such as bid-ask spread volatility
and order book depth. Crucially, we find that high PAS scores can, under specific conditions of market uncertainty, decouple from underlying audit rigor and independently
bolster confidence, presenting a potential ’perception premium.’ Conversely, a low PAS
score has a disproportionately negative effect, suggesting an asymmetry in perceptual
impact. The study concludes that the market’s confidence ecosystem is significantly
shaped by the stylistic and narrative dimensions of audit communication, which act
as heuristics for trust. This reframes audit quality as a dual construct: technical and
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Published: 2018-02-01
presentational. The originality of this work lies in its cross-disciplinary lens, its focus
on the semiotics of audit reporting, and its demonstration of how perceptual artifacts,
once formed, become tangible market forces. These insights contribute to auditing
theory, financial communication, and market regulation by highlighting the need to
consider the architecture of perception alongside the architecture of standards.