Informativeness of the Expanded Audit Report: Evidence from China

• In Event: Expanded Audit Reports

Abstract

This study investigates whether the expanded audit report is informative to investors in the setting of an emerging economy. We exploit the recent staggered adoption of the expanded audit report for A+H and A share firms in China. Using both pre-post and difference-in-differences research designs, we find robust evidence that abnormal trading volume and earnings response coefficients (ERCs) are higher, and stock price synchronicity are lower, in the post-adoption periods than in the pre-adoption periods; these results are consistent with investors finding the expanded audit reports incrementally useful in decision making. In additional tests, we find that the expanded audit report is more informative when there is a greater demand of information for decision-making. Specifically, the increases in abnormal trading volume and ERCs, and the decrease in price synchronicity in the post-adoption periods are more pronounced when the firm is a non-SOE firm and when the firm has higher information uncertainty and/or asymmetry. Furthermore, we find some evidence that the expanded audit report is more informative when there are more key audit matters (KAMs) disclosed in the report, when the KAMs are more readable, when the KAMs disclosures have more negative tone, and when the KAMs have lower similarity with industry peers. To the best of our knowledge, our study is the first to document systematic evidence that the expanded audit report is incrementally informative to investors in an emerging economy.

Authors

• Bengwee Goh, Singapore Management University

• Dan Li, TsinghuaUniversity

• Muzhi Wang, Central University of Finance and Economics