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The Market Implications of Audit Quality and Auditor Switches: Evidence from China
Z. Jun Lin1; Ming Liu2; Zhemin Wang3
2009-09
Source PublicationJOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING
ISSN0954-1314
Volume20Issue:1Pages:35-78
Abstract

Independent audits enhance the credibility of corporate financial reports and assist investors to make rational decisions in the capital market. Nonetheless, the utility of the auditing function depends upon the quality of audits, which is determined by the independence and expertise of auditors. Hence, auditor choice and switch will not only affect an audit's quality, but will also influence decisions made by investors and other market participants. The purpose of this paper is to investigate how investors respond to the quality of audits and auditor switches in the Chinese context. Empirical results show that the quality of an audit and switching to a larger auditor have a positive (negative) impact on earnings response coefficients (ERCs) for firms with positive (negative) abnormal earnings. In contrast, switching to a smaller auditor has a negative (positive) impact on ERCs for firms with positive (negative) abnormal earnings. These results suggest that large auditing firms (Top 10) in China are perceived as more effective for curbing income-increased earnings management, which leads to higher (lower) ERCs for clients with positive (negative) abnormal earnings. Firms' switching to a larger auditor may signal high-quality earnings. Therefore, investors more often increase stock prices when firms have positive abnormal earnings and less often depreciate prices for negative abnormal earnings. Similarly, switching to a smaller auditor may signal lower earning quality, resulting in opposite market responses. In general, the empirical evidence suggests that audit information is valued by the capital market in China. Large auditing firms have been able to product-differentiate themselves within the Chinese stock market.

DOIhttps://doi.org/10.1111/j.1467-646X.2009.01026.x
Language英语
WOS Research AreaBusiness & Economics
WOS SubjectBusiness, Finance
WOS IDWOS:000207835300002
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Cited Times [WOS]:8   [WOS Record]     [Related Records in WOS]
Document TypeJournal article
CollectionFaculty of Business Administration
DEPARTMENT OF ACCOUNTING AND INFORMATION MANAGEMENT
Corresponding AuthorZ. Jun Lin
Affiliation1.Hong Kong Baptist University, Hong Kong
2.University of Macau, Macau
3.University of Wisconsin, Parkside, USA
Recommended Citation
GB/T 7714
Z. Jun Lin,Ming Liu,Zhemin Wang. The Market Implications of Audit Quality and Auditor Switches: Evidence from China[J]. JOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING,2009,20(1):35-78.
APA Z. Jun Lin,Ming Liu,&Zhemin Wang.(2009).The Market Implications of Audit Quality and Auditor Switches: Evidence from China.JOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING,20(1),35-78.
MLA Z. Jun Lin,et al."The Market Implications of Audit Quality and Auditor Switches: Evidence from China".JOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING 20.1(2009):35-78.
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