When Auditors Say 'No,' Does the Market Listen?

Shimin Chen (First Author), Bingbing Hu (Participant Author), Ziye Zhao (Participant Author), Donghui Wu (Participant Author)

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Previous research on whether the market responds to auditors' opinions has provided mixed results. We revisit this issue in China, where individual investors who are more likely to neglect value-relevant information dominate the stock market. In addition to going concern opinions (GCOs), China permits modified audit opinions (MAOs) on violations of accounting standards or disclosure rules (GAAP/DISC MAOs), providing an opportunity not available in the literature to enrich the study of audit-opinion pricing. We find that, ceteris paribus, MAO recipients underperform in the future and have a higher incidence of adverse outcomes such as misreporting and stock delisting, and the market reacts negatively to MAOs during the short window around MAO disclosure. Importantly, MAO disclosure is not followed by negative long-term stock returns, suggesting stock price adjustments to MAOs are speedy and unbiased. These findings hold for both GCOs and GAAP/DISC MAOs. Together, our findings support the informativeness of audit opinions and cast doubt on the argument that investors inefficiently price audit opinions due to information-processing bias.
Original languageEnglish
Pages (from-to)263-305
JournalThe European Accounting Review
Issue number2
Publication statusPublished - 2020

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Project sponsor

National Natural Science Foundation of China

Project name


Project No.



  • Audit modifications
  • Capital market efficiency
  • Information content

Indexed by

  • ABDC-A*
  • SSCI


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