Investor Sentiment and Audit Quality

2017-04-12

Speaker£ºDr ZHOU Kaitang (Guanghua School of Management,Peking University)

Time£º9:40-11:00 April 17,2017(Monday)

Site£ºC273

Abstract£ºThis paper examines the effect of investor sentiment on audit quality. Our analysis is made possible by employing unique datasets of audit adjustments and audit hours in China. We find that, when investor sentiment is high, auditors are less likely to issue unclean audit opinions and firms are associated with lower level of earnings quality. Higher investor sentiment also leads to less frequency of audit adjustments and larger reduction in audit hours but auditors charge higher audit fees. These effects are less pronounced when the auditor firm size is large and the litigation risk is high, and more pronounced when clients are important and investors are optimistic. Our main results can be generalized to the U.S. setting. Taken together, our results suggest that auditor independence and thus audit quality are affected by non-fundamental valuations.