Stock Market Reaction And Long-term Economic Results Of Audit Failure

This thesis examined the Chinese stock market reaction to audit failure, and from two angle points of audit fee and audit failure to examine the long term economic results of audit failure. I collected all the auditor sanctioned accounting fraud cases happened in China from2004to2008, and regarded auditor sanction as affirmation of auditor failure. Then by eliminating the cases which auditors have been merged or bankrupted when sanctioned by Chinese Securities Regulatory Commission, the left12cases combined the research sample.Primarily, I did event study for each case to examine whether stock market had negative reactions to the audit failure in a series of event windows. And found that in most cases, cumulative abnormal return were significantly negative in some event windows, which means the stock market had negative reaction to audit failure. In some cases, the negative reaction happened within30days before the event, which might due to news leaked before it was announced.Moreover, this paper collected data of two years before event date, the year of event date and two years after event date, and examined whether audit fee had significant decrease or audit quality had significant improvement after auditor sanctioned. No significant decrease of audit fee after audit failure was found.In the year which auditor sanction happened, audit fee decreased with no significance, and from the first year after auditor sanctioned, audit fee began to increase, which is not consistent with my hypothesis. And a significant improvement of audit quality, which measured by absolute DA was found. Especially in the year of auditor sanctioned, Abs DA had significant decrease which means a significant improvement of audit quality. But the improvement of audit quality did not last long. From the first year after auditor sanctioned, the improvement of audit quality started insignificant.According to the above research, in theory, this paper provided more evidence of the effectiveness of auditor reputation mechanism in Chinese market and whether adverse selection problem exists on Chinese audit demand market. In practice, this paper tried to find out whether the market, as a hidden mechanism, could punish audit failure.