Audit partner rotation-back and short sellers' front running: Evidence from the Chinese stock market
研究发现，审计合伙人轮换回归的企业在盈余公告前三天异常卖空量更高，表明卖空者利用审计合伙人相关的私有信息进行抢先交易。
This study intends to investigate whether informed front-running hypothesis exists based on informed trading behaviors related to the variation of perceived audit quality of rotate-back firms before earnings announcement dates. Its empirical results show that client firms that rotate back to their pre-MAPR (i.e., mandatory audit partner rotation) engagement partner after the cooling-off period are associated with higher abnormal short selling during 3 days before earnings announcement, compared with non-rotate-back firms. Further channel tests suggest that earnings informativeness of rotate-back firms is less than non-rotate-back firms and short sellers' trading strategy is profitable. Additional heterogeneous tests reveal that the positive association between rotate-back decisions and abnormal short sales, as well as the negative relationship between rotate-back decisions and earnings response coefficients (ERCs), are both attenuated for firms with Big 4 auditors, high institutional ownership, and weak “Guanxi” connections. These findings suggest that corporate disclosure monitoring primarily stems from auditors and institutional investors, while short sellers' information advantage appears to derive from their “Guanxi” networks. However, short sellers do not front-run review partner rotation-back which is consist with the view that engagement partners are the primary auditors who conduct the main audit work. Overall, we provide evidence that short sellers use audit partner related private information to facilitate their trading behaviors.