BACKGROUND It has recently been suggested that auditory hallucinations are the result of a criterion shift when deciding whether or not a meaningful signal has emerged. The approach proposes that a liberal criterion may result in increased false-positive identifications, without additional perceptual deficit. To test this hypothesis, we devised a speech discrimination task and used signal detection theory (SDT) to investigate the underlying cognitive mechanisms. METHODS Schizophrenia patients with and without auditory hallucinations and a healthy control group completed a speech discrimination task. They had to decide whether a particular spoken word was identical to a previously presented speech stimulus, embedded in noise. SDT was used on the accuracy data to calculate a measure of perceptual sensitivity (Az) and a measure of response bias (beta). Thresholds for the perception of simple tones were determined. RESULTS Compared to healthy controls, perceptual thresholds were higher and perceptual sensitivity in the speech task was lower in both patient groups. However, hallucinating patients showed increased sensitivity to speech stimuli compared to non-hallucinating patients. In addition, we found some evidence of a positive response bias in hallucinating patients, indicating a tendency to readily accept that a certain stimulus had been presented. CONCLUSIONS Within the context of schizophrenia, patients with auditory hallucinations show enhanced sensitivity to speech stimuli, combined with a liberal criterion for deciding that a perceived event is an actual stimulus.