Auditors Reponse to Clients Short Sale Exposure: International Evidence

Project: Research

Project Details

Project Description

This project examines how auditors respond to their client firms' ex-ante short-selling potential (SSP). Prior research find that short sellers have a discipline role in curbing managers' earnings management behaviour (Fang, Huang, and Karpoff (2015) and Massa, Zhang, and Zhang (2015)). One the one hand, if clients have already responded to their SSP by reducing pre-audit earnings management behaviour, we expect auditors charge lower audit fees. On the other hand, clients'
ex-ante SSP may increase their future stock price crash risk (Callen and Fang (2015)), therefore increase litigation risk. Auditors may respond by spending more resources and efforts in improving their audit work, thereafter charging higher audit fees. In addition, we study the role of macro information environment in influencing the relation between audit fees and SSP.
Effective start/end date1/09/1630/11/17