Abnormally long audit report lags and future stock price crash risk: evidence from China

Abstract

Purpose Although a substantial body of literature investigates the determinants of audit report lag (ARL), scant empirical evidence exists on the consequences of ARL. The purpose of this paper is to examine the association between abnormally long ARL and future stock price crash risk. Design/methodology/approach This quantitative study employed a large scale (14,445 firm-year observations) of annual financials, audit and ownership information for the Chinese listed companies during 2002–2013 which were retrieved from the China Stock Market and Accounting Research database. Findings This study finds evidence that abnormally long ARL increases the risk of a future stock price crash. Furthermore, the study finds that this adverse consequence is more pronounced for firms with a poor internal control environment. Practical implications Recently literature started to explore the consequences of abnormal ARL such as going concern audit opinion and restatements in the subsequent periods. This paper reveals that abnormal ARL has consequences for investor wealth losses as well. This is relevant in China, where the ongoing economic growth has attracted, and will continue to attract, a growing body of domestic and international investors. Understanding what factors could expose investors to wealth losses is of paramount importance for allocating their scarce capital. Originality/value This study extends the scant literature on the consequences of ARL, and provides useful insights for the Chinese regulatory authorities when considering the appropriateness of the current filing deadline for listed firms.

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