The purpose of this paper is to determine whether audit opinions matter in China after the introduction of several key regulatory changes, specifically aimed at strengthening the confidence of investors in the audit function.
The question is addressed by examining the market response to modified audit opinions of companies listed on the Shanghai Stock Exchange.
In contrast to earlier research, this paper does not find evidence that modified audit opinions have significant information value to Chinese investors, despite the regulatory changes. However, when partitioning the sample by year, there is weak evidence of a stock price response to modified audit opinions in 2003. Examination of the impact of different types of audit opinions shows no consistent results.
The results reported in this paper must be considered in light of the limitations inherent in empirical analyses. That is, the relationships identified in this paper are indicative of potential earnings management or audit opinion shopping, however, the paper cannot provide the actual reasons for these empirical results.
The results suggest the Chinese market is beginning to value audit opinions in the same fashion way as more developed markets.
The paper refines market reaction models used in earlier studies through the introduction of additional explanatory variables, together with an improved methodology.
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