The Market Impact of New Auditing Standards in China

Abstract

To improve audit reports' transparency and information content, China implemented new auditing standards in 2017. The standards, which include disclosing key audit matters, were applied to A+H share companies in 2017 and A-share companies in 2018. This paper uses A+H-share companies as the experimental group and A-share companies as the control group and applies the difference-in-differences method to test the market response to the new auditing standards. We find a statistically significant positive cumulative abnormal return (CAR) during the report release event window for the A+H share companies. The results indicate a greater investor reaction to the release of audit reports under the new standards implying that the audit reforms enhanced the information of the reports. Furthermore, the positive CAR indicates that the reports reassured investors that the audit did not reveal significant problems or that existing weaknesses were addressed. We also found a statistically insignificant difference in the volatility of stock prices during the event window for the experimental and control group.