This study examines whether audit quality in the Shanghai Stock Exchange affects the positive association between change in earnings per share and cumulative abnormal return (CAR). Regression results using 659 Shanghai listed company observations in 1996 and 1997 show that the positive market reaction to increase in earnings is stronger for firms audited by high quality auditors. A broad conclusion of the study is that audit quality is playing an important role in China and that investors in the Shanghai market differentiate between high quality versus low quality auditors.
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