Bingbing Hu

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

Previous research on whether the market responds to auditors’ opinions has provided mixed results. We revisit this issue in China, where the stock market is dominated by individual investors who are less sophisticated in assimilating value-relevant information such as modified audit opinions (MAOs). In addition, China permits audit modifications triggered by violations of the generally accepted accounting principles (GAAP) or disclosure rules (GAAP/DISC MAOs), which are subtler than going concern opinions (GCOs) in their value implications and thus are more likely to be mispriced. The Chinese stock market thus gives us the best chance of detecting MAO mispricing. We find that MAOs predict firms’ future financial performance, and that the market reaction during the short window around MAO disclosure is also consistent with such predictive power of MAOs. Importantly, MAO disclosure is not followed by negative long-term stock returns, suggesting that 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 use this important information in pricing securities due to information processing bias.

The impact of industry concentration on the market’s ability to anticipate future earnings

The existing literature has established the importance of industry concentration in explaining firm performance and information environments. However, little is known about whether and how industry concentration affects investors’ ability to anticipate future earnings. This paper aims to investigate this query by identifying and testing two channels, product market power and intra-industry information transfer, through which industry concentration affects the informativeness of stock returns about future earnings.,The paper measures the informativeness of stock returns about future earnings by the future earnings response coefficient (FERC)). This study estimates the FERC using a firm-level sample from 38 economies.,The authors find that industry concentration significantly enhances investors’ ability to predict future earnings. Further tests show that both product market power and intra-industry information transfer contribute to explaining the positive association between industry concentration and the FERC, with the former playing a more salient role. Finally, the authors show that a country’s effective competition law attenuates the positive impact of industry concentration on the FERC by weakening the economic impact of the two underlying channels.,This study contributes to the growing literature on the price-leading-earnings relation, industry concentration and international corporate governance.