Abstract
Abstract Our paper investigates the information intermediary role of the media from the perspective of auditors. Using negative media coverage as the proxy variable for the watchdog role of the media, our investigation finds that the probability of issuing a modified audit opinion increases when the company has been the subject of negative media coverage and that negative media coverage significantly affects the change of certified public accountant (CPA) firm but does not significantly affect audit fees. In sum, the media as a watchdog affects auditors’ decisions to some extent, and our findings suggest that the media serves as an important information intermediary from the perspective of auditors. We suggest that the hypotheses of risk aversion and saving audit costs explain these findings very well.
Highlights
Bushee et al (2010) find that greater press coverage reduces information asymmetry around earnings announcements
Using the data of media reports provided by the WIND database and relevant financial data from 2006 to 2009, our investigation finds that (1) the probability of issuing a modified audit opinion increases when a company has more negative media coverage and (2) negative media coverage significantly affects the change of certified public accountant (CPA) firm but does not significantly affect audit fees
We consider that the hypothesis of risk aversion and the hypothesis of saving audit costs well explain these findings
Summary
Bushee et al (2010) find that greater press coverage reduces information asymmetry around earnings announcements. Unlike Bushee et al (2010), our paper investigates the information intermediary role of the media from the perspective of auditors using data on the Chinese capital market. The operational and financial risks of companies that have received considerable negative media coverage are higher than those of other companies For the former companies, auditors, motivated by risk aversion, will increase the probability of issuing a modified audit opinion, require higher audit fees, or reject these companies’ audit offers. From another perspective, negative media coverage may provide some clues for auditors to identify existing problems more which in turn will help to save audit costs. This paper is organised as follows: Section II presents the theoretical analysis and hypothesis development; Section III describes the data and research design; Section IV provides the empirical tests and results; and Section V concludes the paper by making policy recommendations
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