Auditing the Auditors and Stock Crashes: International Evidence

60 Pages Posted: 11 Feb 2019

See all articles by Qingyuan Li

Qingyuan Li

Wuhan University - School of Economics and Management

Si Li

Wilfrid Laurier University - School of Business & Economics

Li Xu

Washington State University, Vancouver

Date Written: February 4, 2019

Abstract

We investigate the impact of the initiations of national audit inspection programs on firm-specific stock crash risk in 38 countries worldwide. The staggered commencement of the inspection regimes in different countries allows us to identify the causal effect of audit quality on crash risk. We find a significant decrease (32.39%) in a firm’s crash risk subsequent to the initiations of audit inspections. This negative effect is stronger for auditors with smaller size, limited industry expertise, and longer tenure. We further explore the mechanisms through which audit inspections affect crash risk. We find that the effect of inspection programs on crash risk is driven by client firms facing higher ex ante inspection risk, as well as client firms in which auditors play an important role in monitoring managers.

Keywords: Crash Risk, Tail Risk, Audit Quality, Auditor Inspection

JEL Classification: G12, G34, G18, M42, M48

Suggested Citation

Li, Qingyuan and Li, Si and Xu, Li, Auditing the Auditors and Stock Crashes: International Evidence (February 4, 2019). Available at SSRN: https://ssrn.com/abstract=3329045 or http://dx.doi.org/10.2139/ssrn.3329045

Qingyuan Li

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Si Li

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Li Xu (Contact Author)

Washington State University, Vancouver ( email )

14204 NE Salmon Creek Avenue
Vancouver, WA WA 98686-9600
United States

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