Capital-Market Liberalization and Auditors' Accounting Adjustments: Evidence from a Quasi-Experiment

64 Pages Posted: 31 Dec 2019 Last revised: 14 May 2021

See all articles by Yingwen Deng

Yingwen Deng

Renmin University of China - School of Business

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Cyndia Wang

University of British Columbia - Sauder School of Business

Min Zhang

Renmin University of China - School of Business

Date Written: May 14, 2021

Abstract

Using a shock to the Chinese capital market and unique and detailed audit-adjustment data, this paper investigates the effect of a capital-market liberalization program on auditors’ adjustments to their clients’ financial reports. Employing difference-in-differences tests with propensity-score matching and firm fixed effects, we find that the capital-market liberalization induced by the implementation of the Shanghai - Hong Kong Stock Connect affects auditors’ professional judgment and leads to audit-adjustment changes stimulated by greater reputational and litigation risks for auditors. Specifically, while the liberalization significantly decreases the frequency and magnitude of upward audit adjustments, the probability of downward adjustments remains the same in most cases. Further evidence shows that the effect is more pronounced for companies with high trading volume from Hong Kong investors, audited by the largest audit firms, and with low financial transparency.

Keywords: Auditing, stock-market liberalization, audit adjustments, monitoring effects of market participants, asymmetric auditor behavior, China, regulations

JEL Classification: G30, G34, G38, M10, M40, M41, M42, M48

Suggested Citation

Deng, Yingwen and Hope, Ole-Kristian and Wang, Cyndia and Zhang, Min, Capital-Market Liberalization and Auditors' Accounting Adjustments: Evidence from a Quasi-Experiment (May 14, 2021). Available at SSRN: https://ssrn.com/abstract=3501952 or http://dx.doi.org/10.2139/ssrn.3501952

Yingwen Deng

Renmin University of China - School of Business ( email )

No. 59 Zhongguancun Street
Haidian Dist
Beijing, 100872
China

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Cyndia Wang

University of British Columbia - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Min Zhang

Renmin University of China - School of Business ( email )

Beijing
China

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