Information Content of Text in Chinese Audit Opinions *

Abstract

Abstract This paper investigates the economic consequences of text in Chinese modified audit opinions. We find that negative text is related with positive market response. We also find that the market premium of negative text is more pronounced for companies that suffer losses, disclose conflicts between the board and auditors, or do not fire their top executives after receiving modified audit opinions. Furthermore, the more patents a company applies for, the stronger the economic consequences of negative text. Finally, we find that the use of negative words improves a company’s earnings response coefficient (ERC). Taken together, our results lead us to conclude that text in audit opinions conveys information about “audit caution” instead of corporate performance.