Audit Quality, Institutional Environment And Earnings Forecasting

With the continuous development and improvement of China’s capital market, securities analysts play a more and more important role as information media and communication bridge between investors and listing Corporation. Previous studies found that, China’s institutional environment and audit quality has an important influence on analysts’ earnings forecast performance, but the specific relation among the three concepts are still not been clearly studied. Therefore, this paper chooses a perspective of China’s institutional environment, to discuss the relation among the institutional environment, audit quality and earnings forecast, basing on the financial data from 2010 to 2014 of China’s listed companies. As for how to measure the institutional environment variable, I use the method of dual-listing to divide the listed company into 3 groups of AH, AB and A companies. What’s more, I use Discretionary Accruals and Auditor Experience to measure audit quality, which is the highlight of this paper. This article hopes to discuss how the institutional environment can make up for the lack of audit quality of earnings forecast performance differences through a large sample empirical test. At the same time t, I hope to explore how to improve the construction of China’s institutional environment according to the management level and firm perspective.The empirical results show that Discretionary Accruals (DA) is negatively related to accuracy of earning forecasting and positively related to the desperation. The more list companies make earnings management, the lower audit quality of the management perspective they have, which has no benefit to improve earning forecasting. Moreover, institutional environment has no impact on the behavior of list companies’earning management, which means we cannot use intuitional environment to improve the relation between management audit quality and earning forecasting. Meanwhile, auditor experience is positively related to accuracy of earning forecasting and negatively related to the desperation of earning forecasting. The more experience auditors have, the easier they can recognize earning management level, which can improve the performance of security analysts. What’s more, in a more rigorous system environment, the firm tends to send more experienced auditors to audit, which can improve the quality of the financial statements, and promote the performance of analysts’earnings forecasts. That’s to say, we can forced the stringency of audit firms to send more experienced CPAs through better institutional environment. In areas with good institutional environment, it constraints firms to enhance audit quality so as to promote earnings forecast accuracy.According to the empirical results, we should pay more attention to the role of securities analysts in the capital market and improve the usefulness of earnings forecast information. At the same time, the relevant departments need to strengthen the supervision of listing Corporation financial report information quality, improve and strengthen the system construction, and strengthen the independence of certified public accountants.