Voluntary Disclosure of Auditors’ Report on Internal Control: Firm Characteristics and Economic Consequences

Abstract

Using propensity score matching (PSM) and the difference-indifference (DID) approach, this paper explores the characteristics of listed Chinese firms that voluntarily disclose auditors’ reports on internal control and the economic consequences. Using a sample of non-financial firms listed on the main boards of the Shanghai Stock Exchange and the Shenzhen Stock Exchange between 2006 and 2010, we find that firms are more likely to voluntarily disclose their auditors’ reports on internal control if they have higher state ownership, lower managerial ownership, sanction records, audit committees, non-Big Four auditors as their auditors of annual financial reports, unqualified auditors’ opinions on financial reports, less board independence, after controlling for firm size, liabilities, performance, and history. Moreover, as compared to a control group that exhibits similar characteristics, firms that voluntarily disclose auditors’ reports on internal control are associated with positive earnings quality and negative cost of equity capital.

Keywords

auditors’ reports on internal control / earnings quality / cost of equity capital / propensity score matching (PSM) / difference-in-difference (DID) approach