Auditor Failure and Market Reactions: Evidence from China

International Journal of Accounting, Auditing and Performance Evaluation, Forthcoming

Posted: 30 Aug 2009 Last revised: 5 Sep 2009

See all articles by Sharad Asthana

Sharad Asthana

University of Texas-San Antonio

Heibatollah Sami

Lehigh University

Zhongxia Shelly Ye

Kennesaw State University

Date Written: August 29, 2009

Abstract

Zhongtianqin, the largest Chinese auditor in 2000, collapsed in 2001 owing to its audit failure. This study examines how the market reacted to the audit scandal in the Chinese institutional setting. Chinese investors are entitled to recover their investment losses from auditors owing to audit failure. However, civil lawsuits against auditors have not succeeded in the past. Therefore, Chinese auditors do not face the real threat of shareholder litigation. They only have the threat of costly governmental penalties for violating the regulations. Even so, we demonstrate that Chinese audit still contains both assurance and insurance values. Also, the entire market reacted to the scandal. Moreover, we show that investors differentiate audit quality in stock valuation. Finally, companies audited by international auditors suffered less value losses. This study adds to the worldwide literature on auditor failure.

Keywords: assurance effect, audit quality, auditor failure in China, domestic vs. international auditors, governmental penalties, insurance effect, market reactions, stock value

Suggested Citation

Asthana, Sharad and Sami, Heibatollah and Ye, Zhongxia Shelly, Auditor Failure and Market Reactions: Evidence from China (August 29, 2009). International Journal of Accounting, Auditing and Performance Evaluation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1464044

Sharad Asthana (Contact Author)

University of Texas-San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

HOME PAGE: http://www.sasthana.com

Heibatollah Sami

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

Zhongxia Shelly Ye

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

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