Auditing Standards, Increased Accounting Disclosure, and

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Auditing Standards, Increased Accounting Disclosure, and
Information Asymmetry: Evidence from an Emerging Market

A Proposal

December 2003

Auditing Standards, Increased Accounting Disclosure and Information Asymmetry : Evidence from an Emerging Market

The interest in accounting disclosure and audit quality by academics, practitioners, and regulators heightened following the various financial reporting scandals, and subsequent legislative and professional response to these scandals (e.g., ASX Corporate Governance Guide 2003; Sarbanes-Oxley Act 2002). An important question that has been on the minds of many is whether the implementation of stricter auditing standards such as those mandated
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(see Schauer 2003).5 A plausible reason for the paucity of research in this area might be that the rich disclosure environment of U.S. firms limits the incremental impact of audit quality on accounting disclosure quality (Healy and Palepu 2001). In contrast, the disclosure level in the Chinese emerging market is relatively low, thus audit opinions could convey useful information to the market about the quality of a firm’s accounting information. Empirical studies on Chinese capital markets have documented links between auditing regulations and audit qualifications (DeFond et al. 2000), and between audit qualifications and market return (Gul et al. 2003). I extend this line of research by investigating the impact of increased auditing regulation on firm’s information environment.
Second, most prior studies examine short-term impact of accounting disclosure on information asymmetry (e.g., see Yohn 1998). As noted by Callahan et al. (1997), these studies focus only on the short-run information asymmetry risk faced by dealers and investors rather than the long-run information asymmetry risk, which is of much concern to policy-makers and regulators.6 In this study, I examine the long-term information asymmetry “between the informed and uninformed traders caused by the structural differences in the access to information” (Callahan et al. 1997, 57).
Finally, the Chinese emerging market implemented a series of auditing standards within a short period. The
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