Auditing and Earnings Quality: Evidence from China Using Variability of Stock Returns and Trading Volume
Posted: 15 Mar 2009
Date Written: January 29, 2009
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
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