Does CEO-auditor dialect sharing affect stock price crash risk? Evidence from China

Using unique data on signing auditors' and CEOs' native dialects in China from 2007 to 2020, this study investigates the effect of dialect sharing between CEOs and auditors (CADS) on firm-specific stock price crash risk. We find that CADS is significantly and positively associated with crash risk, implying that social ties can have direct economic consequences for investors. Influence channel tests suggest that CADS impairs information quality and reduces risk disclosure in management analysis and discussion and extended audit reports, which increases crash risk. Cross-sectional tests show that the effect of CADS on crash risk is more prominent for firms located in weak legal environments and with low transparency. Additionally, we find that the positive association is more prominent when firms are audited by non-Big 4, more important for auditors, and whose auditors work outside their hometowns. This study provides an in-depth understanding of the role of social ties in the capital market and enriches the literature on the factors influencing stock price crash risk.

Automated summary

Using unique data on signing auditors' and CEOs' native dialects in China from 2007 to 2020, this study investigates the effect of dialect sharing between CEOs and auditors (CADS) on firm-specific stock price crash risk. The results show that CADS is significantly and positively associated with crash risk, suggesting that social ties can have direct economic consequences for investors. Influence channel tests indicate that CADS impairs information quality and reduces risk disclosure, leading to increased crash risk.