Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/187555
Authors: 
Lin, Zhiwei
Jiang, Yihong
Xu, Yixuan
Year of Publication: 
2011
Citation: 
[Journal:] China Journal of Accounting Research [ISSN:] 1755-3091 [Volume:] 4 [Year:] 2011 [Issue:] 3 [Pages:] 135-154
Abstract: 
We present a framework and empirical evidence to explain why, on average, 11% of listed firms in China received modified audit opinions (MAOs) between 1992 and 2009. We argue that there are two reasons for this phenomenon: strong earnings management incentives lower firms' financial reporting quality and soft budget constraints weaken the information and governance roles of audit opinions. We find that firms' financial constraints eased after receiving MAOs, which suggests that MAOs have limited economic consequences. Further analysis shows that this phenomenon predominantly exists in government-controlled firms and firms that receive MAOs for the first time. We also find that MAOs have not influenced financial constraints after 2006. Finally, we find that MAOs did not affect borrowing cash flows from banks until 2005, suggesting that MAOs did not start affecting bank financing until that year. We also find that firms receive more related-party financing after receiving MAOs. Our results indicate that a limited effect on bank financing and increased related-party financing reduce the effect of MAOs on financial constraints.
Subjects: 
Modified audit opinions (MAOs)
Economic consequences
Financial constraints
Earnings management
Government intervention
Political connections
JEL: 
M42
G32
L14
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by-nc-nd/3.0/
Document Type: 
Article

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