Information sharing between mutual funds and auditors

• Main Authors: HOPE, Ole-Kristian, RAO, Pingui, XU, Yanping, YUE, Heng
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Information Sharing; Mutual Funds; Auditors; China; Mutual Fund Investments; Trading Profits; Emerging Markets; Guanxi; Audit Quality; Audit Fees; Accounting
• Online Access: https://ink.library.smu.edu.sg/soa_research/1786; https://ink.library.smu.edu.sg/context/soa_research/article/2813/viewcontent/SSRN_id3313541.pdf
• Institution: Singapore Management University

This paper examines whether there is information sharing between mutual funds and their auditors about the auditors’ other listed firm clients. Using detailed hand-collected data from the Chinese market and employing levels, changes, and PSM analyses, we find that mutual funds earn higher profits from trading in firms that share the same auditors. The effects are more pronounced when firms have a more opaque information environment and when the audit partners for the fund and the partners for the listed firm share school ties. The evidence is consistent with information flowing from auditors to mutual funds, providing mutual funds with an information advantage in firms that share the same auditors. We further find that auditors benefit by charging higher audit fees for mutual fund clients and by improving their audit quality for listed firm clients. Our study provides evidence of bi-directional information sharing between two important market intermediaries.