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Abnormally long audit report lags and future stock price crash risk: evidence from China

Ahsan Habib (Massey University, Auckland, New Zealand)
Hedy Jiaying Huang (Massey University, Auckland, New Zealand)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 12 April 2019

Issue publication date: 31 July 2019

Abstract

Purpose

Although a substantial body of literature investigates the determinants of audit report lag (ARL), scant empirical evidence exists on the consequences of ARL. The purpose of this paper is to examine the association between abnormally long ARL and future stock price crash risk.

Design/methodology/approach

This quantitative study employed a large scale (14,445 firm-year observations) of annual financials, audit and ownership information for the Chinese listed companies during 2002–2013 which were retrieved from the China Stock Market and Accounting Research database.

Findings

This study finds evidence that abnormally long ARL increases the risk of a future stock price crash. Furthermore, the study finds that this adverse consequence is more pronounced for firms with a poor internal control environment.

Practical implications

Recently literature started to explore the consequences of abnormal ARL such as going concern audit opinion and restatements in the subsequent periods. This paper reveals that abnormal ARL has consequences for investor wealth losses as well. This is relevant in China, where the ongoing economic growth has attracted, and will continue to attract, a growing body of domestic and international investors. Understanding what factors could expose investors to wealth losses is of paramount importance for allocating their scarce capital.

Originality/value

This study extends the scant literature on the consequences of ARL, and provides useful insights for the Chinese regulatory authorities when considering the appropriateness of the current filing deadline for listed firms.

Keywords

Citation

Habib, A. and Huang, H.J. (2019), "Abnormally long audit report lags and future stock price crash risk: evidence from China", International Journal of Managerial Finance, Vol. 15 No. 4, pp. 611-635. https://doi.org/10.1108/IJMF-07-2018-0213

Publisher

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Emerald Publishing Limited

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