The Impact of Transportation Infrastructure Development on Auditor Effort and Audit Quality: Evidence from a Natural Experiment

54 Pages Posted: 21 Jun 2019

See all articles by Xianjie He

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy

Jin Zhi

Southwestern University of Finance and Economics (SWUFE)

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Oliver M. Rui

China Europe International Business School (CEIBS)

Date Written: June 5, 2019

Abstract

We rely on the launch of high speed railway (HSR) services in China as a natural experiment to examine the role that transportation infrastructure development plays in shaping auditor effort and audit quality. In a staggered difference-in-difference framework, we find that auditor effort evident in the number of days spent on the engagement rises after the launch of an HSR route to the city where the client is located. In measuring audit quality with restatements and discretionary accruals, we document that actual audit quality improves after HSR services become available. Consistent with capital market participants rewarding firms that narrow information asymmetry by improving accounting transparency, we find that the launch of the HSR program also leads to higher perceived audit quality in the form of clients enjoying cheaper borrowing costs and higher valuations. Our core results hold under extensive sensitivity analysis, including when we implement propensity score matching to control for variation in client characteristics and re-estimate the regressions for falsified HSR launch dates. Collectively, our evidence implies that improving transportation infrastructure to facilitate travel translates into auditors working harder on engagements and delivering stricter external monitoring of the financial reporting process.

Keywords: Transportation Infrastructure Development, Auditor Effort, Audit Quality

JEL Classification: M42, R40

Suggested Citation

He, Xianjie and Zhi, Jin and Pittman, Jeffrey A. and Rui, Oliver M., The Impact of Transportation Infrastructure Development on Auditor Effort and Audit Quality: Evidence from a Natural Experiment (June 5, 2019). Available at SSRN: https://ssrn.com/abstract=3405107 or http://dx.doi.org/10.2139/ssrn.3405107

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Jin Zhi

Southwestern University of Finance and Economics (SWUFE)

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Oliver M. Rui

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

HOME PAGE: http://https://www.ceibs.edu/rui-oliver

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