The value of ex ante auditor disclosure: evidence from China

Abstract

Purpose: this study examines whether and why ex ante disclosure of detailed auditor information influences investor decisions. Prior research focuses solely on ex post disclosure of auditor names, which is often embedded in annual reports, arrives too late, and conveys too little. China’s 2020 reform mandates pre-engagement disclosure of comprehensive auditor backgrounds, allowing us to test whether timely, granular disclosure reduces information acquisition costs and enables quality differentiation. The study shifts the audit disclosure debate from ex post verification to ex ante expectation formation, addressing when, what, and how auditor information matters.

Design/methodology/approach: using an event study approach, we first examine investor reactions to post-reform announcements containing auditor identity information. We then compare these reactions to pre-reform announcements without such disclosure to isolate the causal effect of ex ante auditor information. We further test how information acquisition costs moderate investors’ differentiation of auditor quality and examine the roles of analyst coverage and media attention.

Findings: ex ante disclosure of auditor identity elicits positive market reactions, moderated by information acquisition costs. Responses to high-quality auditors, especially audit partners, are strongest when directly disclosed, weaken with low-cost search, and vanish under high-cost inference. This cost gradient confirms information accessibility as the key mechanism. Analyst coverage and media attention amplify reactions by interpreting and disseminating information, thereby reducing investors’ processing costs.

Originality/value: this study contributes by identifying information acquisition costs as the key mechanism linking ex ante disclosure to investor decisions, a mechanism overlooked in ex post settings. It provides direct evidence on audit partners’ relative importance and offers regulatory insights showing that mandated pre-engagement disclosure of structured auditor backgrounds reduces information frictions and enables quality differentiation.
Keywords: ex ante disclosure of auditor information, market reaction, audit partner, auditor quality, information acquisition costs
 

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ORCID for June Cao: orcid.org/0000-0003-2981-4174

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