| The report of the 19th National Congress of the Communist Party of China emphasized that China’s economy has gradually shifted from a stage of high-speed growth to a stage of high-quality development.In order to cope with the transformation of the economic development model,regulatory agencies are also constantly promoting the innovation of regulatory methods.The comment letter system is an institutional innovation made to cooperate with China’s economic development on the basis of learning from foreign experience.In 2013,China’s two major stock exchanges formally implemented an information disclosure reform,shifting the focus of supervision on listed companies from pre-examination to post-inquiry.Before the reform,listed company announcements needed to be pre-examined by the exchange before they were released.After the reform,the listed company can directly disclose the announcement,and the exchange will conduct post-mortem inquiries on the problems in the disclosed announcement through the comment letter.Comment letters in China can be divided into annual report comment letters,licensing reorganization comment letters,and concern letters.Among them,the annual report comment letter directly related to the company’s annual report accounted for the largest proportion.The annual report comment letter refers to the exchange inquiring about the problems existing in the disclosure of the company’s annual report,mainly for the company’s operation,accounting treatment and other issues.China’s annual report comment letter system can be divided into two stages: non-public disclosure and mandatory public disclosure.Before 2015,the annual report comment letter and the company’s reply letter do not need to be disclosed to the public;after 2015,the annual report comment letter and the company’s reply letter need to be disclosed in a timely manner.As an innovative supervision method developed by Chinese exchanges in recent years,annual report comment letter system has become one of the important means to supervise the compliance of listed companies’ accounting policies,the quality of information disclosure and even prevent financial risks in the capital market.Information intermediaries are important participants in the capital market.They can provide services such as auditing,securities underwriting,and credit rating through professional and prudent verification work to reduce financial risks in the capital market.They are important "gatekeepers" in the capital market.The "Securities Law of the People’s Republic of China" officially implemented in 2020 emphasizes the need to consolidate the responsibilities of intermediaries as "gatekeepers" in the market.Therefore,it is an important question whether the annual report comment letter system can have a positive impact on the information intermediaries in the capital market.Auditors,analysts and credit rating agencies are three important intermediaries in the stock market and bond market respectively,but they have completely different characteristics.As the auditor of the company’s annual report,the auditor has the highest degree of association with the annual report comment letter,the lowest degree of information asymmetry with the listed company,and the highest regulatory risk.Analysts’ income is linked to the quality of earnings forecasts,so there is an incentive to use the annual report comment letter to improve the quality of forecasts,but there is a high degree of information asymmetry with listed companies.Credit rating agencies’ revenue is usually paid by issuers rather than investors,resulting in less incentive for credit rating agencies to use annual report comment letters to improve the quality of their ratings.Therefore,the credit rating agency has the smallest relationship with the annual report comment letter,and at the same time has a high degree of information asymmetry with the listed company.To sum up,the above three intermediaries have different degrees of association with the annual report comment letter,different regulatory pressures,and different information environments,which lead to differences in the possible impact of the annual report comment letter on them.In order to examine the effectiveness of China’s annual report comment letter system,this paper uses the data of China’s annual report comment letters from 2013 to2019,which were not publicly disclosed and mandatory disclosure.According to the degree of association with the annual report of listed companies,this paper examines the impact of the comment letter system on auditors,analysts,and credit rating agencies in turn,trying to explore whether China’s annual report comment letter system can have a positive impact on the behavior of intermediaries,and whether there are differences in the impact paths of different intermediaries.The research of this paper focuses on the following three aspects: First,can the annual report comment letter have an impact on auditors? What are the impacts? The main risks that auditors face are divided into litigation risk,reputation risk and regulatory risk.In which way does the annual report comment letter affect the auditor?Second,can the annual report comment letter have an impact on analysts? What are the impacts? Different from auditors,analysts are external information intermediaries of listed companies,and there is a higher degree of information asymmetry between them and listed companies.In which way does the annual report comment letter affect analysts? Third,can the annual report comment letter have an impact on credit rating agencies with a low degree of connection? What are the impacts? Similar to analysts,credit rating agencies are external information intermediaries of listed companies.They are faced with a high degree of information asymmetry when conducting credit ratings,and have a low degree of correlation with the annual report.Which way is the annual report comment letter used to rate the credit rating? Institutions have an impact?Through a series of theoretical analysis,hypothesis derivation and empirical testing,this paper draws the following conclusions:First,the annual report comment letter will significantly improve the auditor’s conservatism.The specific performance is that after the company receives the comment letter of the annual report,the auditors are more likely to issue non-standard audit opinions,and the audit opinions are stricter.The greater the number of questions contained in the comment letter,the greater the number of rounds that the listed company has received comment letters,the comment letter requiring auditors to express special opinions,and the greater the number of questions requiring auditors to express opinions,the more conservative the auditors will be.At the same time,there is no significant difference in the impact of the comment letter on auditors before and after mandatory disclosure,indicating that it is regulatory risk rather than litigation risk and reputational risk that have an impact on auditors.Furthermore,before and after the mandatory disclosure,there is no difference in the impact of the comment letter on the auditor’s conservatism between large and small firms,which once again proves that the comment letter affects the auditor’s conservatism through the path of regulatory risk rather than reputation risk.Second,comment letters can significantly improve the quality of analysts’ forecasts.The more questions the comment letter contains and the more comment letters the listed company has received,the higher the quality of analyst forecasts.At the same time,the comment letter has no significant impact on analysts’ forecasts in the undisclosed stage,and the quality of analysts’ forecasts can be significantly improved after mandatory disclosure,indicating that the mandatory disclosure of inquiry regulatory information can effectively improve the quality of analysts’ forecasts.Further,compared with star analysts,comment letters can improve the forecast quality of non-star analysts.The ability of non-star analysts to obtain private information is not as good as that of star analysts,so they face a greater degree of information asymmetry.The comment letter has a positive impact on the quality of analysts’ forecasts by providing incremental information.On the other hand,comment letters are more likely to improve the quality of the forecasts of the tracking analysts for companies with more volatile earnings than those with less volatile earnings.The greater the degree of earnings volatility of listed companies,the higher the degree of information asymmetry faced by analysts.The comment letter reduces the degree of information asymmetry faced by the tracking analysts of companies with high earnings volatility by providing incremental information,which significantly improves the quality of analysts’ forecasts.The above conclusions suggest that comment letters have a positive impact on the quality of analysts’ forecasts by providing incremental information rather than a path to improving the quality of annual reports.Third,the comment letter will significantly improve the rating quality of credit rating agencies.After the company receives the inquiry letter of the annual report,its main credit rating will be significantly lowered,the falsely high rating will be suppressed,and the rating quality will be improved.The greater the number of questions contained in the comment letter,and the multiple comment letters received by the listed company,the quality of the credit rating will be significantly higher.At the same time,the comment letter has no significant impact on the credit rating in the undisclosed stage,and the quality of the credit rating can be significantly improved after the mandatory disclosure,indicating that the mandatory disclosure of the inquiry regulatory information can effectively improve the quality of the credit rating.Further,compared with large-scale rating agencies,the comment letter can improve the rating quality of small-scale rating agencies.The ability of small-scale rating agencies to obtain private information is not as good as that of large-scale rating agencies,so they face a greater degree of information asymmetry.The comment letter reduces the information asymmetry between small-scale rating agencies and large-scale rating agencies by providing incremental information,which significantly improves the rating quality of small-scale rating agencies.In conclusion,the effectiveness of China’s annual report comment letter system has been verified.Comment letters can affect not only auditors with strong ties to a company’s annual reports,but also analysts and even credit rating agencies with weak ties.In addition,the influence path of the comment letter on different intermediaries is different.The research conclusions of this paper have important theoretical value and can also bring certain policy implications,which are mainly reflected in the following four aspects:First,the findings of this paper provide an important complement to the literature on the effectiveness of comment letters.Existing literature has found that comment letters can have an impact on the companies being inquired as well as capital market stakeholders such as institutional investors and creditors(Gietzmann and Isidro,2013;Hu Ning et al.,2020).This paper systematically examines the impact of the comment letter and its mandatory disclosure on capital market information intermediaries with different characteristics.Even the actions of credit rating agencies have an impact.In addition,there are differences in the influence paths of comment letters on intermediaries with different characteristics.Second,the research conclusions of this paper reflect the importance of mandatory disclosure of regulatory information.Mandatory information disclosure can effectively solve the problems of insufficient information disclosure supply and low disclosure quality,and improve the efficiency of information use in the market(Coffee,1984;Zingales,2009).Using the data of the comment letter in the non-public disclosure stage,this paper finds that for external information intermediary analysts and credit rating agencies,the comment letter can only help them in the mandatory disclosure stage.Third,the research conclusions of this paper verify the importance of government regulation in the capital market in the developing stage.First,through unique sample data and research design,this paper successfully separates regulatory risk from reputational risk and litigation risk,proving that before the capital market is fully mature,a strong and effective government regulatory system can play a substitute role and promote high Supply of quality audits.Secondly,in the context of relational transactions in China,the ability of analysts to obtain private information is different(Li et al.,2020).The research conclusion of this paper finds that the comment letter can significantly alleviate the degree of information asymmetry among analysts.Finally,the existing literature mainly believes that the rating quality of credit rating agencies is driven by the reputation mechanism(Bolton et al.,2012;Mariano,2012;Kraft,2015),and few studies examine the impact of government regulation on rating quality.The findings of the study demonstrate that government regulation also has a positive impact on rating quality.Fourth,the research in this paper can bring certain policy implications.This paper examines the effectiveness of China’s inquiry supervision policy in consolidating the role of intermediaries as "gatekeepers" in the capital market.The research conclusions show the implementation effect of China’s annual report comment letter system,which is important for protecting the rights and interests of investors in the capital market and preventing systematic It is of great significance to avoid financial risks and maintain the steady development of China’s capital market.In general,this paper uses data from two different stages to deeply examine the impact of China’s annual report comment letter system on capital market information intermediaries with different degrees of relevance and characteristics.The main findings are that the comment letters influence auditors by increasing regulatory risk,influence analysts,credit rating agencies by providing incremental information.On the one hand,the research of this paper supplements the relevant literature,and on the other hand,comprehensively reveals the regulatory effect of China’s annual report comment letter system,which brings enlightenment to regulators and other market participants. |
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