Underwriter-Auditor Relationship and Pre-IPO Earnings Management: Evidence from China

Posted: 5 Feb 2018

See all articles by Du Xingqiang

Du Xingqiang

Independent

Xu Li

University of Texas at Dallas - Department of Accounting & Information Management; School of Business

Xuejiao Liu

University of International Business and Economics

Shaojuan Lai

Xiamen University

Date Written: January 27, 2018

Abstract

This study examines the influence of underwriter-auditor relationship (UAR) on pre-initial public offering (IPO) earnings management. Using a sample of Chinese to-be-listed firms, we find that a close UAR, as reflected in repeated collaborations between an underwriter and an audit firm in IPOs, is positively associated with pre-IPO earnings management. This association is more pronounced for firms with politically connected auditors/underwriters, firms with less reputable auditors/underwriters, firms located in provinces with weak legal environment, firms to-be-listed on boards with lax listing requirements, and firms whose auditors are with low industry specialization, and legal liability exposures. We provide further evidence that UAR is associated with greater likelihood of irregular activities in post-IPO period and poorer post-IPO financial performance. To the extent that we control for alternative explanations and potential endogeneity, our results suggest that the collusion incentive is likely to drive repeated collaborations between underwriters and auditors in the Chinese IPO market. Our findings provide interesting implications for auditors, investors, and regulators seeking to understand the Chinese IPO market.

Keywords: Underwriter–auditor relationship (UAR), Earnings management, The collusion incentive, Political connections, Underwriter (auditor) reputation, Legal environment

Suggested Citation

Xingqiang, Du and Li, Xu and Li, Xu and Liu, Xuejiao and Lai, Shaojuan, Underwriter-Auditor Relationship and Pre-IPO Earnings Management: Evidence from China (January 27, 2018). Journal of Business Ethics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3111625

Du Xingqiang

Independent ( email )

Xu Li

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

School of Business ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Xuejiao Liu

University of International Business and Economics ( email )

Beijing, Beijing
China

Shaojuan Lai (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

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