Reduced mismatch negativity (MMN) in response to auditory change is a well-established finding in schizophrenia and has been shown to be correlated with impaired daily functioning, rather than with hallmark signs and symptoms of the disorder. In this study, we investigated (1) whether the relationship between reduced MMN and impaired daily functioning is mediated by cortical volume loss in temporal and frontal brain regions in schizophrenia and (2) whether this relationship varies with the type of auditory deviant generating MMN. MMN in response to duration, frequency, and intensity deviants was recorded from 18 schizophrenia subjects and 18 pairwise age- and gender-matched healthy subjects. Patients' levels of global functioning were rated on the Social and Occupational Functioning Assessment Scale. High-resolution structural magnetic resonance scans were acquired to generate average cerebral cortex and temporal lobe models using cortical pattern matching. This technique allows accurate statistical comparison and averaging of cortical measures across subjects, despite wide variations in gyral patterns. MMN amplitude was reduced in schizophrenia patients and correlated with their impaired day-to-day function level. Only in patients, bilateral gray matter reduction in Heschl's gyrus, as well as motor and executive regions of the frontal cortex, correlated with reduced MMN amplitude in response to frequency deviants, while reduced gray matter in right Heschl's gyrus also correlated with reduced MMN to duration deviants. Our findings further support the importance of MMN reduction in schizophrenia by linking frontotemporal cerebral gray matter pathology to an automatically generated event-related potential index of daily functioning.