Hidden Costs of Rumor Clarification

Abstract

We use a sample of Chinese listed firms between 2009 and 2020 and document that firms that have clarified rumors witness an increase in audit fees. The impact is primarily driven by the clarification of negative rumors. Furthermore, we demonstrate that the increased likelihood of restatement and litigation risks are potential mechanisms leading to higher audit fees. This increase in audit fees is more pronounced for State Owned Enterprises (SOEs) or firms with Big10 auditors, and after China’s anti-corruption campaign. In contrast, this effect is mitigated by industry specialist auditors and higher independence of firms’ audit committee. Our study sheds light on how rumor clarification, a formal yet interactive form of corporate disclosure, is perceived by auditors and adds new evidence to the hidden costs of rumor clarification.

Keywords: JEL Classification Codes: G30, K22, M41, M42 Rumors, monitoring costs, Audit fees, China JEL Classification Codes: G30, K22, M41, M42 Rumors, monitoring costs, Audit fees, China

JEL Classification: G30, K22, M41, M42