Non-State-Controlled Firms and Auditor Choice under State Capitalism: Evidence from China
Posted: 8 Feb 2012 Last revised: 25 Jun 2014
Date Written: February 1, 2012
Using a sample of listed Chinese non-state-controlled enterprises (NSCEs) from 1999 to 2011, we show that NSCEs with political connections are less likely to engage high quality (big) auditors than similar non-connected NSCEs. These results suggest that connected NSCEs under Chinese state capitalism exhibit higher opacity than non-connected NSCEs. We control for reverse causality by showing that NSCEs that newly acquire political connections are more likely to switch to smaller auditors than matched NSCEs without a change in political connection. We control for audit fee to address the explanation that the change in auditors is motivated by a desire to reduce the cost arising from audit fees. Our results remain robust after controlling for endogeneity in a two-stage model. The likelihood of engaging big auditors is reduced further for connected NSCEs in regions with weaker market development where rent seeking is easier.
Keywords: auditor choice, transparency, political connection, rent seeking, Chinese NSCEs
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