The Price Contagion Effects of Financial Reporting Fraud and Reputational Losses: Evidence from the Individual Audit Partner Level

62 Pages Posted: 25 Oct 2015 Last revised: 29 Oct 2016

See all articles by Ferdinand A. Gul

Ferdinand A. Gul

Deakin University - Department of Accounting

Chee Yeow Lim

Singapore Management University - School of Accountancy

Kun Wang

Tsinghua University

Yanping Xu

Jinan University

Date Written: October 2016

Abstract

This study investigates the existence of price contagion effects for the low-quality audits of individual audit partners and the associated reputational losses in China. Low-quality partners are identified as those whose clients have been sanctioned by regulators for financial reporting fraud. Our evidence shows that sanctions induce a significant stock price decline among the contagion firms that share common low-quality partners and common low-quality audit firms; however, the decline is greater for the former. We also find that the price contagion effects of low-quality partners are more pronounced for firms located in regions with weak institutional development and less pronounced for state-owned firms. Finally, we find that low-quality audit partners suffer from reputational losses in terms of a higher likelihood of partner turnover and a reduced market share at the partner level.

Keywords: Audit partner, Audit quality, Contagion effects, Reputational loss, Market reactions

JEL Classification: M41, M42, M48

Suggested Citation

Gul, Ferdinand A. and Lim, Chee Yeow and Wang, Kun and Xu, Yanping, The Price Contagion Effects of Financial Reporting Fraud and Reputational Losses: Evidence from the Individual Audit Partner Level (October 2016). Available at SSRN: https://ssrn.com/abstract=2679310 or http://dx.doi.org/10.2139/ssrn.2679310

Ferdinand A. Gul

Deakin University - Department of Accounting ( email )

Melbourne
Australia

Chee Yeow Lim (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Kun Wang

Tsinghua University ( email )

Beijing, 100084
China

Yanping Xu

Jinan University ( email )

Guangzhou, Guangdong 510632
China

Register to save articles to
your library

Register

Paper statistics

Downloads
357
Abstract Views
1,648
rank
83,734
PlumX Metrics