External Audit,Internal Control And Stock Price Crash Risk

The assurance service provided by the external auditors and the internal control mechanism of the company itself are always considered as important parts of the internal and external company governance mechanism in both academic and practice fields and they can reduce the negative effect of symmetric information and principalagent problem.However,in the case of different regions,different levels of economic development and different cultures,the effectiveness of those governance mechanism need to be quantified and be more specific deconstruction and evaluation.This paper shows that the external audit can improve information asymmetry between the internal and external company by increased information transparency and hence lower the future crash risk of stock prices.On the other hand,internal control mechanism can improve over-investment behavior of the companies and reduce the risk of the companies and thus it can lower the crash risk of stock price in the future.Using a large sample of A-share listed companies for the period 2009-2014,this paper provide evidence that the level of auditor's industry expertise and of internal control can reduce the future crash risk of stock price of A-share companies,by improving the firm-level transparency and by controlling over-investment.This dissertation mainly clarifies several questions.One is external audit and internal control level as important parts of company's internal and external governance mechanism,whether they can influence the crash risk of listed companies' stock price.Second is whether the influence of external audit and internal control level results from improve companies' information transparency,or the reduction of operation risks of the companies.Third,Internal control and external audit services in reducing stock price crash risk,whether there is a complementary or alternative relationship? Therefore,this dissertation is divided into several chapters as following:The main conclusions are:Firstly,the level of auditor's industry expertise has negative correlation with future crash risk.Using whether to choose Big 4 audit firm or auditor with industry expertise as proxy variable,the empirical results show that audit service affect the crash risk of stock price by improving the information content,not by lowing the operation risk.Audit service,as an outside corporate governance mechanism,could prevent managers from hiding �bad news�,lowing the stock synchronicity,improving the pricing efficiency,reducing stock price crash risk.Secondly,by using the index of internal control and the number of internal weakness disclosed as proxy variables,the empirical test shows the level of internal control has negative correlation with stock price crash risk.Thirdly,by using modified Richardson over-investment model,the dissertation discoveries that the level of over-invetment has significant positive correlation with crash risk.On the other hand,internal control has a significant negative impact on overinvestment behavior and high quality internal control promotes investment efficiency,reducing operation risk and lowing crash risk of stock price.Fourthly,considering that external audit services and internal control affect the stock price crash risk through different channels,this papr use group regression and add intersection item into the regression model.The empirical results show taht instead of substituted relation,there a complementary relation between audit and internal control at the stock price crash risk issue.