Can Patent Quality Alleviates Information Asymmetry in Chinese Intellectual Property Market: Evidence From Auditing Field

Due to the lack of professional knowledge, auditing innovation quality has always been a big problem for auditors. Patent citation is a new and informative signal. We hope this signal can help auditors reduce the lack of professional knowledge and reduce the audit input of innovation quality. By examining Chinese non-financial firms between 2011 and 2019, we use patent citation as the proxy of patent quality and find that firms with higher patent quality have lower audit input at the same level of R&D expenditure. Further tests show that the signaling effect of patent quality is limited. Patent quality signals will work when the audited firm is a high-tech enterprise, or when the Key Audit Matters (KAMs) involve items such as R&D expenditures. But the auditor industry specialization can replace the influence of patent quality. Our results imply that auditors can use patent quality as a signal to reduce the difficulty of obtaining information and risk evaluation. Firms should focus on the quality of patents and display their innovation capabilities through the intellectual property (IP) market. China should strengthen the protection of private rights and continuously enhance the supporting mechanism of IP market.

Automated summary

Auditing innovation quality has been a challenge for auditors due to their lack of professional knowledge. However, this study suggests that patent citation can serve as an informative signal for auditors to reduce their lack of expertise and minimize audit input for innovation quality. The results indicate that firms with higher patent quality tend to require lower audit input, especially in high-tech enterprises where key audit matters involve R&D expenditures.