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The article presents a study on how the stock market was affected by China's convergence to International Financial Reporting Standards (IFRS) in 2007. It looks at how Chinese stock markets reacted favorable to events prior to the IFRS convergence with particular attention given to firms wither greater dependence on external capital.

SUMMARY: We investigate the chief audit executive's (CAE) internal audit supervisory role by examining the change in internal audit monitoring effectiveness following the turnover of CAEs. Using a sample of firms listed on the small and medium enterprise board of China's stock exchange, we find that CAE turnover is accompanied by a reduction in financial reporting/internal control quality and that the reduction is more pronounced for firms whose successor CAEs have lower financial expertise than their predecessors. Further analysis shows that the negative association with financial reporting/internal control quality is stronger when the turnover is for personal reasons than when it is for internal transfer of the CAE. These findings are robust to a battery of sensitivity checks, including placebo tests and matching diagnostics. Our results highlight the importance of the CAE for a firm's internal audit functions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G34; M42; M51. [ABSTRACT FROM AUTHOR]

We examine the relation between geographical and institutional dispersion and accounting misstatements in China. We hypothesize that geographical dispersion is positively associated with the likelihood of accounting misstatements in subsidiary firms because of increasing monitoring cost and find evidence consistent with this prediction. We also focus on institutional dispersion because institutional duality may affect an organization's behavior, but do not find that institutional dispersion is associated with accounting misstatements in subsidiary firms. Next, we find that geographical dispersion and institutional dispersion are negatively associated with misstatements in parent firms' financial statements, consistent with the investor recognition argument. Lastly, we find that the negative (positive) relation between dispersion and parent-level (subsidiary-level) misstatements is more pronounced for state-owned firms and for firms with a wider (narrower) control-ownership wedge. [ABSTRACT FROM AUTHOR]

We examine the effects of audit quality on earnings management and cost of equity capital for two groups of Chinese firms: state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). The differences in the nature of the ownership, agency relations and bankruptcy risks lead SOEs to have weaker incentives than NSOEs to engage in earnings management. As a result, the effect of audit quality in reducing earnings management will be greater for NSOEs than for SOEs. In addition, investors’ pricing of information risk as reflected in the cost of equity capital will be more pronounced for NSOEs than for SOEs with high and low audit quality. We find empirical evidence consistent with these hypotheses. Our findings indicate that (1) while high-quality auditors play a governance role in China, that role is limited to a subset of firms, and (2) even under the same legal jurisdiction, the effects of audit quality (in the form of lower earnings management and cost of equity capital) vary across firms with different ownership structures. Our study extends prior research by focusing on the economic consequences of SOEs’ and NSOEs’ auditor choices and underscores the importance of controlling for ownership type when conducting audit research [ABSTRACT FROM AUTHOR]

SUMMARY: Using data from the Chinese market where related party transactions (RPTs) are particularly prevalent, we examine how the independent auditor responds to the potentially heightened risk of RPTs and the efficacy of the auditor's response. First, we find that the auditor is more likely to issue a modified audit opinion that specifically discusses RPTs (RPTMAO) to firms reporting higher related sales or related lending, but not to firms reporting higher RPTs of other categories (i.e., related purchases, related borrowing, and related assets/equity transactions). These findings suggest that the auditor alerts investors to the possibility of earnings management and/or expropriation risk from related sales or related lending through audit opinions. The positive relation between related sales and RPTMAO is driven by related sales with nonmarket-based or undisclosed pricing policy and related sales above the industry average. Second, RPTMAO has robust predictive power for future RPT-related restatements, and the predictive power is greater than that of modified opinions that do not specifically discuss RPTs, suggesting that the auditor is effective at communicating the risk associated with RPTs through opinion modifications, especially RPTMAOs. JEL Classifications: M49 Data Availability: Data used in this study are available from public sources. [ABSTRACT FROM AUTHOR]