The effect of expanded audit report on IPO underpricing: Evidence from China

This study investigates the impact of the expanded audit report on IPO underpricing. Using the sample of A-share listed firms in China from June 2014 to November 2021, we find that the expanded audit reports can reduce the speculative behavior of investors in the initial phase of IPOs, resulting in lower IPO underpricing and consecutive rising limits. The channel tests suggest that the disclosure of key audit matters reduces value uncertainty and alleviates investors' local bias. Our results are consistent to a series of robustness tests. Further analyses show that the negative relation between expanded audit reports and IPO underpricing intensifies when the legal environment is weak and firms' information transparency is low. Additional tests uncover positive market reaction after the mandatory disclosure rule in the long run. Overall, our study adds new insights to the information effects of the expanded audit reports in emerging markets.