Investment Opportunity Sets、Intangible Investment Intensity And Governance Effects Of Audit

The information of accounting earnings, which can greatly influence a company’s strategy making and daily operating, is a basic tool to analyze a company. Earnings quality is a index that measures accounting earnings whether it is reliable or not. On the one hand, the information of accounting earnings is one of the most important standards of stocks issuing, trading halts and delisting. The investors of the capital markets also rely on this information to make investment decisions, which will finally be reflected on stock prices and the cost of capital. On the other hand, accounting earnings is often a basis for people to judge a company’s operating results. If a company’s operating results is not perfect, then the managers of the company will be blamed of not managing well and their career will be affected. So, in order to maximize the utility, managers will take all the measures to change accounting policies or accounting estimates of their company. It is more likely that a company will take advantage of it if it’s accounting policies are more flexible, so as to benefit from the capital markets.The information of accounting earnings is more important for those companies with high investment opportunity sets. Firstly, company with high investment opportunity sets mostly are high-tech enterprises, which have high efficiency of resource use and low energy consumption, so they have more chances to grow. And these companies will prosper the capital market a lot. Secondly, companies with high investment opportunities need to raise funds in the stock market to meet its great capital requirements. At the same time, companies with high investment opportunity sets can easily become the darling of investors because of its high growth. As a result, for the purpose of the efficiency and prosperity of our capital markets, we should pay high attention to the quality of accounting earnings.However, compared to other enterprises, the accounting information of companies with high investment opportunities sets are more likely to lack fidelity. According to Smith(1992), because the behaviors of managers are more unobservable, the information asymmetry between managers and the owners is greater in companies with high investment opportunity sets. This objectively create a condition for managers to manipulate earnings for personal gains. Besides, managers have a strong incentive to manage earnings so as to guarantee themselves with enough free cash flows when the companies are in face of a lot of investment opportunities (Liu Chang,2010). Other researchers such as Peng Shaobin (2008) also found that the more investment opportunities a company has, the worse the earnings quality.In addition, companies with high investment opportunity sets have more R&D spending chances. However, the expenditure in intangible assets are mostly be recognized as costs and fees, but not be capitalized. Even if sometimes the expenditure were capitalized, the subsequent accounting treatment will be arbitrary. Kumar&Krishnan(2008) posits in their research that error in measuring both CFO and accruals increases with investment opportunities due to deficiencies in accounting practice, causing investors to reduce their reliance on these numbers.Because the risk of information distortion increase with investment opportunities, and it is of key importance to make sure that the information of accounting earnings is true in the capital market, this research mainly concentrate on relationship among investment opportunities sets, intangible investment intensity and earnings quality. And in order to find a way to solve this problem, this paper innovatively introduces the variable of high quality audit, so as to prove that external auditing can assume the responsibility of improving earnings quality of companies with high investment opportunity sets.The research found:Firstly, earnings quality declines as investment opportunities increase, this proves that the quality of accounting information is not well in our capital markers. Secondly, when intangible investment intensity is high, earnings quality declines much more as investment opportunities increase. It is consistent with Kumar&Krishnan’s the noisy measure hypothesis. Thirdly, when the variable of high quality audit is introduced, earnings quality increased as investment opportunities increase in companies with high intangible investment intensity. The nuclear content and main structure of the article are as follows:The first part introduces the research background, significance of the article and research methodology. The second part is mainly about the status and literature review home and abroad. The third part further elaborated and analyzed related concepts and relevance of this paper. The fourth part develops there hypotheses on the base of the existing theories. The fifth part designed the empirical regression model, the size and the source of sample data, and the design of variables and the regression of the model. The sixth part purposed the countermeasures and suggestions according to the results of empirical.