When Bonding Fails: Audit Firm Oversight of US-Listed Chinese Companies

Abstract

Although "good" companies have incentives to signal their types by listing in the strict regulatory environment of the US, there have been an unprecedented number of recent accounting frauds by US-listed Chinese companies. We argue that the traditional bonding argument failed for US-listed Chinese companies due to a lack of audit quality and audit firm oversight. We find: 1) that US-listed Chinese companies were more likely than US-listed companies from other countries to avoid hiring high quality annually-inspected US audit firms, and 2) that investors reacted negatively to news that US regulators would be unable to provide oversight of Chinese auditors.

Keywords: Audit quality, Audit firm oversight, PCAOB inspections, Chinese companies, Fraud