Investigating the Effect of Abnormal Audit Fees on the Relationship between Entropy of Financial Statements and Stock Returns

Changes in the information contained in the financial statements of companies is one of the most important sources of information for decision making for users of financial statements. The greater the range of changes in the items in the financial statements, the higher the information risk or entropy of the financial statements. When the entropy of financial statements is high, users of financial statements become confused and financial analysts are not easily able to estimate the future of the companies; therefore, the entropy of financial statements is considered as a degree of uncertainty in order to predict the future status of the companies. Investing in the stocks of those companies that have high entropy has a high risk, and due to the high risk and the possibility of bankruptcy, it is possible that the principal and profit of capital are lost. For this reason, when investors intend to invest in such companies, are exposed to information risk, And this makes investors adjust their expected rate of return. Failure to meet the expectations of investors will cause them to flee the stock market; This has a significant effect on the cost of capital and the actual return on shares of companies, Therefore, the purpose of this study was to investigate the effect of entropy of financial statements on stock returns and the moderating role of abnormal audit fees on the relationship between entropy of financial statements and stock returns.

The current research is applied in terms of purpose and regression correlation analysis in terms of method. The data required for this research have been collected from the website of Tehran Stock Exchange, databases and references to basic financial statements and the Notes to the financial statements of the surveyed companies. To achieve the purpose of the research, 94 companies listed on the Tehran Stock Exchange during the period 2013 to 2020 were examined. Combined data analysis and multivariate linear regression were used to test the research hypotheses. Also, we used Microsoft Excel version 16 and Eviews version 9 to analyze the data and extract research results.

The research findings show that the entropy of financial statements (general entropy, Shannon continuous entropy and Renny continuous entropy) has a negative and significant relationship with stock returns. In other words, with increasing entropy of financial statements, stock returns decrease. Also, the research findings indicate that the abnormal audit fees moderate the relationship between entropy of financial statements and the indicators used for it (general entropy, Shannon continuous entropy and Renny continuous entropy) with stock returns. In other words, an abnormal audit fee reduces the severity of the relationship between the entropy of the financial statements and the indicators used for it (general entropy, Shannon continuous entropy and Renny continuous entropy) with stock returns.

Those business units that have a higher entropy risk, their balance sheet composition has more changes. The existence of high entropy in financial statements indicates the more information risk, due to the uncertainty and instability of financial statement items in business units. In other words, investors consider the amount of changes in different items of the balance sheet and income statement compared to the previous period in order to get a correct understanding of the management's performance and their success or failure in achieving the desired goals of the business unit.Also creditors when granting loans, by calculating the entropy of financial statements of business units, If the amount is high, they refuse to give a loan due to the high risk and the ambiguity of the return of the principal and the guaranteed interest of the credits, which causes restriction in the External financing by business units. in other words, entropy of financial statements increases the risk of information and consequently discourages investors and creditors in their decisions to invest or lend and leads to a decrease in stock returns. On the other hand, Audit quality is effective on stock returns through increasing the quality of financial statements and information transparency of business units. Also  abnormal audit fee as a measure of audit quality improve the quality and credibility of financial statements as one of the most important sources of information for users of financial statements and lead to reduces the intensity of the relationship between the entropy of financial statements and stock returns and this means that investors and creditors and other users of financial statements consider the auditor's fees to be caused by other factors (other than economic dependencies) and in their opinion, the company's information is a Good support for evaluating the stock price.