Charles J. P. Chen
City University of Hong Kong
Bin Srinidhi
City University of Hong Kong
Xijia Su
City University of Hong Kong
Abstract: Though auditing is generally believed to make financial statements more reliable and useful, there is little direct evidence to support that belief. One of the primary reasons for the lack of such direct evidence is that auditing is mandatory for listed companies and a direct comparison between audited and unaudited reports is generally not feasible. In this paper, we are able to make this direct comparison by exploiting a unique opportunity in the Chinese auditing environment. In recent years, a third of Chinese listed companies have had their semi-annual reports audited and of these audits, about half are voluntary. We develop a model to show that one beneficial effect of auditing is the increased precision in estimating market returns. The empirical results are consistent with the model. We also find a significantly lower earnings management but no difference in disclosure for audited firms.
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