Engagement Auditor Industry Specialization and Stock Price Crash Risk: Evidence from China

55 Pages Posted: 30 Oct 2017

See all articles by Hua Feng

Hua Feng

Xi'an Jiaotong University (XJTU)

Ahsan Habib

Massey University - School of Accountancy; Massey University

Hedy Jiaying Huang

School of Accountancy, Albany Campus

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management

Date Written: October 29, 2017

Abstract

We investigate the effects of engagement auditor industry specialization on stock price crash risk. Although research on audit partners has been growing, we are not aware of any prior studies that investigate partner-level specialization and crash risk. Using a large sample of Chinese stocks spanning the period 2003-2015, we find a statistically significant and negative association between auditor industry specialization and stock price crash risk. Our mediation tests suggest that audit partner industry specialization decreases the risk of price crash by mitigating earnings manipulation. We further document that the negative association is more pronounced for firms that switch from non-specialist audit partners to specialist audit partners. We also find some evidence that audit partners’ personal characteristics moderate the association between partner specialization and crash risk. Our results remain robust to alternative measures of partner specialization.

Keywords: Engagement auditor, industry specialization, stock price crash risk, China

JEL Classification: G12, G30, M41, M42

Suggested Citation

Feng, Hua and Habib, Ahsan and Huang, Hedy Jiaying and Qi, Baolei, Engagement Auditor Industry Specialization and Stock Price Crash Risk: Evidence from China (October 29, 2017). Available at SSRN: https://ssrn.com/abstract=3061269 or http://dx.doi.org/10.2139/ssrn.3061269

Hua Feng

Xi'an Jiaotong University (XJTU) ( email )

26 Xianning W Rd.
Xi'an Jiao Tong University
Xi'an, Shaanxi 710049
China

Ahsan Habib (Contact Author)

Massey University - School of Accountancy ( email )

Auckland
New Zealand

Massey University ( email )

Auckland
New Zealand

Hedy Jiaying Huang

School of Accountancy, Albany Campus ( email )

Auckland
New Zealand

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

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