Non-State-Controlled Firms and Auditor Choice under State Capitalism: Evidence from China

Posted: 8 Feb 2012 Last revised: 25 Jun 2014

See all articles by Bin Srinidhi

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Hao Zhang

University of Macau - Faculty of Business Administration

Tianyu Zhang

The Chinese University of Hong Kong

Date Written: February 1, 2012

Abstract

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

Suggested Citation

Srinidhi, Bin and Zhang, Hao and Zhang, Tianyu, Non-State-Controlled Firms and Auditor Choice under State Capitalism: Evidence from China (February 1, 2012). Available at SSRN: https://ssrn.com/abstract=2000621

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Hao Zhang

University of Macau - Faculty of Business Administration ( email )

Macau

Tianyu Zhang

The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong

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