Audit Committee Disclosure Tone and Corporate Violations in China: Textual Analysis

Abstract

This study employs text analysis to examine the effect of audit committee reporting, measured by the tone of audit committee disclosures, in predicting the likelihood and frequency of violations. In total, 1,349 companies listed on the Chinese Shanghai Stock Exchange were assessed for this paper from 2014 to 2019. The results suggest that the more active the audit committee’s disclosure tone, the lower the probability and frequency of violations. In addition, the results are robust after controlling for endogenous issues. The further analysis shows that better readability of the text aggravates the negative relationship between the tone of text disclosure and violations. The path analyses show that audit committees predict corporate violations by affecting internal control quality and auditors’ opinions. The results suggest that disclosure of audit committee reporting improves transparency in the activities of audit committees, which plays a positive governance role in indicating corporate violations. Meanwhile, the study provides a reference for further reform of audit committee information disclosure.