An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Wendy J. Green
The University of New South Wales

Yi Wang
The University of New South Wales

Robert M. Czernkowski
Sydney University

Abstract: This study examines market responses to qualified audit opinions of companies listed on the Shanghai Stock Exchange for the period 1999-2003. Comparison to earlier studies provides evidence of changes to market valuation of the audit and assurance function after the introduction of several key regulatory changes. Further, the study provides an empirical application of Melumad and Ziv’s (1997) theoretical model of market reactions to avoidable and unavoidable audit opinions, as well as to opinions of different form and content. Finally, earlier market reaction models are refined with explanatory variables such as the Chinese “special treatment” status. Results suggest that the value placed on audit opinions by the Chinese market has changed since earlier studies. Further, both the form and content of the opinion is found to affect the market reaction, with reactions only for the severest forms of audit opinions: going concern, qualified opinions with explanatory notes and disclaimers.

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