Disclosed Analyst Corporate Site Visits, Audit Adjustments, and the Quality of Financial Statements

Using a difference-in-differences research design that exploits the impact of mandatory full disclosure of an analyst’s corporate site visit in China, we find robust evidence that full disclosure improves the quality of financial statements via increased audit adjustments. First, after the full disclosure regulation, audit adjustments are significantly greater for firms with analyst site visits in which forward-looking information and accounting and finance topics are discussed during the visits but not those covering nonfinancial and miscellaneous information. The results are also stronger for firms that give more relevant answers to analysts’ questions in disclosure, for firms with higher asset tangibility, followed by fewer analysts, experienced less past informed risk arbitrage, and in the cases where auditors have more pressure to avoid audit failures. These results support the idea that detailed public disclosure of site visits on an open-access website can reveal useful information and press auditors to examine company financial records with extra care. Second, due to the spillover of relevant information, the disclosure also raises audit adjustments for firms in the same industry audited by the affected auditor or her peer auditors working in the same audit firm. Finally, after the full disclosure regulations, these affected firms, as mentioned in the first and the second points, compared with other firms and conditioned on having audit adjustments, issue higher-quality financial reports – they have less discretionary accruals and a lower likelihood of issuing restatement. Overall, the evidence supports the notion that full disclosure of analyst site visits via a public digital platform improves the quality of financial reporting by improving auditing services.