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.
Audit partner, Audit quality, Contagion effects, Reputational loss, Market reactions
Corporate Finance | Finance and Financial Management
FERDINAND, A. Gul; LIM, Chee Yeow; WANG, Kun; and XU, Yanping.
The price contagion effects of financial reporting fraud: Evidence from the individual audit partner level. (2015). 115-61. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1589
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