Market Process, Audit Quality And Post Earnings Announcement Drift

PEAD has attracted the attention of many researchers as one of anomalyphenomena in securities markets since Ball and Brown （1968） discovered it,it proves that the efficient market hypothesis is not valid. Researchers try toexplain it from two different theories（efficient market theory and behavioralfinance theory）,however, they find that behavioral finance theory has moreexplanatory power to the PEAD. The behavioral finance theory try to explainthe PEAD based on the overreaction hypothesis and the underreactionhypothesis.We also start from the overreaction hypothesis and the underreactionhypothesis to explore the PEAD in our country, and we think the difference inquality of audit may have some impact to the degree of people’s acceptanceand trust of accounting information. That means the difference in quality ofaudit also has impact on investor psychology and behavior of stock selection,we try to link the audit quality and PEAD to explore the relationship betweenthem. We further analyze the different impacts of different levels of the marketprocess in the roles played by audit quality, and the impact of market processon PEAD.This paper adopts normative research and positive research. In this paper,firstly introduced this paper’s background, purpose, meaning, methods, andpossible innovations; secondly, introduced and reviewed the literature ofearnings announcement effects, differentiation of audit quality and accountinginformation quality, market process and audit quality; Third, introduced thesystem background of stock market and make a theoretical analysis on theefficient market hypothesis, under reaction and overreaction theory,asymmetric information and audit requirements theory Signal hypothesis ofaudit requirements, then put forward the hypothesis based on the introductionand review above; fourth, by constructing multiple regression models,collecting correlative data, using the econometric-based empirical researchmethods, we tested the hypothesis. This paper’s main contribution are:1. PEAD does exist in our stock market,but the movements of our PEADare different from the overseas research. The PEAD of good news fluctuatesupward slowly after the disclosure of annual reports, then it turnes to fluctuate downward after certain time. The PEAD of bad news fluctuates downwardquickly after the disclosure of annual reports, but the downward fluctuationlasts only one or two days,then it turns to fluctuate upward. The movements ofPEAD in our stock market show there is widespread and serious speculationin our stock market, our investors are irrational.2. There is a positive correlation between audit quality and PEAD, itmeans high quality of audit can aggravate the magnitude of the drift. We thinkit proves that the market reactions to auditor’s financial statements betweenbig-fours and non-big-fours are differenct.The big-fours’financial statementsare more positively reacted by the market. High quality audit can enhance andstrengthen investor response to accounting earnings.3. In the relatively developed regions, there are more significant positivecorrelation between audit quality and PEAD. It means that investors in therelatively developed regions pay more attention to the companies who hirehigh-quality audit and trust them more.