Perceived audit quality, state ownership, and stock price delay: evidence from China

Abstract

We examine the effect of audit quality on stock price delay and whether the effect differs between two groups of Chinese firms: state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). Using a sample of 15,019 firm-year observations for Chinese listed firms over the period 2001–2011, we find that firms with Big 4 auditors are associated with less stock price delay and this negative association is weaker for SOEs than for NSOEs. Our findings suggest that high-quality auditors play an important role in the price formation process, in that there is less stock price delay, and this role varies across firms with different ownership structures. Additional analyses show that the audit quality of international Big 4 auditors is perceived to be different from that of domestic Big 4 auditors. The effect of the perceived audit quality on price delay is different for SOEs controlled by the central government compared to those controlled by the local governments. Our study contributes to extant research by focusing on the economic consequences of auditor choices and by emphasizing the importance of recognizing ownership type when conducting audit research.

Data availability Data used are from public sources identified in this paper.

Keywords:

• Perceived audit quality
• state-owned enterprises
• stock price delay

Acknowledgements

Jun Chen acknowledges financial support from the National Natural Science Foundation of China [grant number NSFC-71102085 and NSFC-71572181] and the Natural Science Foundation of Zhejiang Province [grant number Y7100206]. Wang Dong acknowledges financial support from the National Natural Science Foundation of China [grant number NSFC-71302060 and NSFC-71332008].

Notes

1. The appointment of politically connected CEOs is typically linked to the political objectives of diverting corporate resources for social or political goals, which are not always consistent with the economic goals of maximizing firm values.

2. Following Hou and Moskowitz (2005) and Callen, Khan, and Lu (2013), we estimate firm-level delay and portfolio-level delay over the year from July to June. Our main results are similar when we compute price delay measures over the year from January to December or from May to April.

3. To facilitate the presentation of the results, we use the percentage form of the delay measure.

4. The results based on median analyses are similar. To save space, we only tabulate results based on mean analyses.

5. As the insider trading data in China provided by Shenzhen Stock Exchange is not available until late 2004 (http://www.szse.cn/main/disclosure/jgxxgk/djggfbd/), we use the change of stock ownership by firms’ management to firm’s total outstanding shares as an alternative measure.

6. To economize on space, all the control variables (see Table 3) are suppressed.

7. This opportunistic managerial behavior might be even exacerbated by the mandatory disclosure requirement in China that the listed firm must issue management forecast if it either reports an annual loss, turns an annual loss into an annual gain, or reports an annual income that increases or decreases by 50% from that in the last period.

8. During 2010 and 2011, only four audit firms have changed their structure from Limited Liability to Limit Liability Partnership (i.e. BDO China Shun Lun Pan, Crowe Horwath, Pan-China, and RSM China).

9. We define the domestic Big 4 auditors as the largest four domestic CPA firms in China according to the annual audit fees ranking. Examples of domestic Big 4 auditors are BDO, Ruihua, ShineWing, Pan-China, etc.