The Spillover Effect of The Securities and Exchange Commission - China Audit Oversight Dispute

• In Event: Contempary Issues in Auditing and Data Analytics

Abstract

This study investigates the impact of the perceived increase in uncertainty about Chinese audit credibility on United States (U.S.) multinationals with Chinese operations. Specifically, we examine market reactions to nine events associated with the Securities and Exchange Commission’s pursuit of Chinese audit oversight. We predict and find that the news of this dispute not only creates uncertainty about the audit quality of U.S.-listed Chinese companies but also causes collateral damage to the valuation of U.S. multinationals’ with Chinese operations. The return over the two-day event windows is significantly more negative for U.S. firms with Chinese operations compared to their peers. On average, the market price of a firm with Chinese operations falls by an incremental 2.6 percent across the events; equivalent to an average loss of $181.4 million. Additional tests show that the spillover effect is weaker (stronger) for firms whose investors were (not) previously aware of the concerns about Chinese financial information quality.

Authors

• Bingyi Chen, Boston University

• Jenelle Conaway, Boston University