Impact of audit quality on financial market development: the case of emerging markets

Purpose We examine the impact of audit quality (AUQ) on financial market development (FMD) in emerging market countries (EMCs). Design/methodology/approach Our design involves an AUQ variable that avoids the standalone problems of prior research and an FMD variable based on diverse sources. Panel data for 2006–2019 are obtained for a sample of 24 EMCs identified by the Financial Times Stock Exchange. We use a regression methodology that includes the standard tests for panel data. Findings We offer evidence that AUQ has a significant positive impact on FMD for EMCs. This finding supports the notion that AUQ provides transparent and reliable financial reporting that reduces information asymmetry between investors and firms, thus stimulating investor confidence, which boosts investment and liquidity in EMC financial markets. Research limitations/implications This study has standard limitations, as results can depend on the sample, data sources and period tested. Practical implications Our results have implications for public and private EMC stakeholders (equity owners, chief executive officers, policymakers, financial institutions and government officials) charged with promoting financial and economic development. Social implications EMCs with high-quality audits can positively impact FMD, enabling greater economic stability. Originality/value To our knowledge, this is the first study to provide evidence consistent with the direct positive impact of AUQ on FMD for a sample of EMCs.