Stock Price Contagion Effects of Low-Quality Audits at the Individual Audit Partner Level

What is it about?

We use Chinese audit partner data to show that partners associated with financial reporting fraud induce share price declines among non-fraudulent firms audited by the same audit partners. We find that the price contagion effects occur at the audit partner level. In addition, we find that share price declines are more pronounced when low-quality partners (LQPs) failed to issue modified audit opinions during the period in question and when the LQPs were from one of the Top 10 audit firms. Investors impose larger penalties on contagion firms when fraud is more severe. The personal characteristics of LQPs (except gender) do not cause a difference in market reaction to contagion firms. Overall, our results speak to the importance of audit partner identity to stock market valuation.

Featured Image