Auditing and Earnings Quality: Evidence from China Using Variability of Stock Returns and Trading Volume

Posted: 15 Mar 2009

See all articles by Charles J. P. Chen

Charles J. P. Chen

China Europe International Business School (CEIBS)

Xijia Su

City University of Hong Kong (CityUHK) - Department of Accountancy

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: January 29, 2009

Abstract

In this study, we examine the effect of interim auditing on inter-investor convergence in China. We show a decrease in stock price volatility and trading volume after a brief transitory increase for audited interim financial statements compared to non-audited ones. We interpret this result as suggesting that investors place more weight on audited than on non-audited information. Further, this finding suggests that audited public information crowds out private information collection effort in China rather than enhancing it. We interpret this finding as being a result of less incentive for private information collection in China due to restrictions on short trading and undeveloped option and future markets in individual securities. Results of this study are robust to variations in event window length and specification of empirical measures.

Keywords: auditing, belief divergence, variability of stock returns, trading volume

Suggested Citation

Chen, Charles J. P. and Su, Xijia and Srinidhi, Bin, Auditing and Earnings Quality: Evidence from China Using Variability of Stock Returns and Trading Volume (January 29, 2009). Available at SSRN: https://ssrn.com/abstract=1335052

Charles J. P. Chen

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Xijia Su

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788 7995 (Phone)
+852 2788 7944 (Fax)

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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