Investors' Response to Auditor Changes: Evidence from the Use of Chinese Auditors in Hong Kong

• In Event: Auditor and Executive Changes

Abstract

To increase the international reputation and market share of Chinese domestic accounting firms, Chinese government recently persuaded the Hong Kong (HK) market regulators to permit some selected auditors in mainland China to audit the financial statements of Chinese firms that are cross listed in HK (i.e. H-share firms). This paper examines the characteristics of H-share firms that voluntarily replaced their HK auditors with Chinese auditors, and the market reaction to the auditor switches following this policy change. We find that 38 out of 147 H-share firms voluntarily switched from HK to Chinese auditors during 2011-2013. Switching firms appear to have larger size, less need of external financing, longer listing history, a lower percentage of foreign revenue, and are less likely to be audited by Big4. More importantly, we find that investors in both HK and Chinese domestic markets negatively react to the auditor switches from HK non-Big4 to China non-Big4, but do not react to the auditor switches from HK Big4 to China Big4. Overall, our finding suggests that government intervention alone is not sufficient enough to change investors’ perception about the audit quality of China non-Big4. The finding of this study has important policy implication and may be of interest to investors, auditors, standards setters, and market regulators.

Authors

• Zhenfeng Liu, Florida International University

• Stephen Wen-Jen Lin, Florida International University