Market Reactions To Changes In Auditors And Changes In Financial Reporting Quality

In recent years,the increasingly strict market supervision has made the auditing work of accounting firms more prudent,and the proportion of companies that have been issued with non-standard audit opinions has gradually increased.Listed companies have begun to frequently change audit institutions due to audit pressure.The replacement of audit institutions,as an indirect reflection of the company's operating status and the quality of financial reports,has always been the focus of attention of investors and regulators,and one of the central issues in capital market research.There is certain information asymmetry between listed companies and investors.The public can only see the announcement documents disclosed by the company,and cannot speculate on the management's psychology.It is impossible to know the basis and reasons for the company's decision.Regarding the issue of replacing audit institutions,the public can find relevant descriptions in the "Announcement on the Appointment of Audit Institutions" and "Board Resolutions".The research in this paper finds that more than half of the 700 companies that changed audit institutions in three years have switched from large accounting firms to small accounting firms(ranked by the accounting firm's operating income).Generally speaking,large accounting firms with higher reputations often refuse to issue standard unqualified audit opinions for "problem" companies because of their higher quality standards and better corporate image.The clients of these large firms are often welldeveloped companies that have better quality of financial reports and have a relatively higher degree of recognition in the market.In recent years,ST&SAT,a well-known local women's shoe brand,has been forced to face fierce competition from domestic and foreign brands and is going through Internet transformation.During the transformation process of ST&SAT,it gradually abandoned its main business and moved to marketing and influencer manufacturing companies.In 2018 and 2019,the market showed completely different reactions to the two audit agency changes of ST&SAT.In the past two years,the accounting firm of ST&SAT was replaced twice in a row,and the reasons disclosed were both “needs for the development of listed companies”.The replacement of the audit agency in the 2018 annual report received a positive response from the market,yet the replacement in 2019 received negative market reaction.This article believes that the cause of this phenomenon is not only affected by the company's own operating conditions,but also by the investors' interpretation of the content of the announcement that there will be a change of audit institutions.A more detailed description of the reason will bring positive information to the market,while avoiding it will only make the market have a negative understanding of the company's change of accounting firm.In addition,unlike previous research conclusions,this article believes that the reasons for changes in different types of audit institutions will not all lead to a reduction in the quality of the company's financial reports,some of which may lead to an increase in the quality of financial reports,and some of which may not have an impact.In order to verify the conclusions obtained through case analysis in this article,and to address several key issues in the replacement of audit institutions by listed companies,this article introduces new text analysis technology through a combination of case analysis,event research,and empirical research.From the perspective of the investors,concerning the replacement of audit institutions of listed companies in China from 2016 to 2018,this article examines:(1)whether the announcement content of the company's replacement of audit institutions hides the factors that affect the stock price during the window period.(2)Whether the types of reasons for the changes in different types of audit institutions imply different quality of financial reports of listed companies.Text analysis,as one of the important branches of computer science,is being gradually introduced into the field of economics,and new research perspectives have emerged,but most of them are currently limited to the narrow grammar and phrase level.The research method of this paper is a comprehensive method,combining machine learning and text analysis.Because machine learning has the function of topic analysis and semantic analysis,combining it with text analysis breaks through the existing lexical scope and expands to semantic analysis of long sentences and paragraphs.Specifically,this article mainly uses the pre-trained machine learning model provided by Baidu AI open platform to vectorize the text,and then calculate the text similarity.The research results show that:(1)For those who use “development of listed company” as the reason,the more detailed the announcement of a listed company's replacement of an audit agency,the higher the excess return of individual stocks,and the more positive the market response.(2)Taking "the term of "major changes in the listed company" and "the former firm voluntarily abandoned" as the reason for the change implies worse quality of financial report of listed companies.The research in this article shows that language of announcements can reflect the company's development and business status.For the study of audit institutions with listed companies,these language clues are used to discover and predict important company factors relating to the true operating conditions,quality of financial reports and degree of earnings management.The findings of this paper can provide listed companies with certain suggestions on the content of their official announcement,provide investors with a new perspective on the impact of changes in auditors,and provide regulators with a new perspective on examining the quality of financial reporting and inappropriate earnings management of listed companies.