Hometown Ties and the Quality of Government Monitoring: Evidence from Rotation of Chinese Auditors

39 Pages Posted: 1 May 2020

See all articles by Jian Chu

Jian Chu

Nanjing University - School of Business

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Songtao Tan

Renmin University of China - School of Finance

Yongxiang Wang

University of Southern California - Marshall School of Business

Date Written: April 2020

Abstract

Audits are a standard mechanism for reducing corruption in government investments. The quality of audits themselves, however, may be affected by relationships between auditor and target. We study whether provincial chief auditors in China show greater leniency in evaluating prefecture governments in their hometowns. In city-fixed-effect specifications – in which the role of shared background is identified from auditor turnover – we show that hometown auditors find 38 percent less in questionable monies. This hometown effect is similar throughout the auditor’s tenure, and is diminished for audits ordered by the provincial Organizations Department as a result of the departure of top city officials. We argue that our findings are most readily explained by leniency toward local officials rather than an endogenous response to concerns of better enforcement by hometown auditors. We complement these city-level findings with firm-level analyses of earnings manipulation by state-owned enterprises via real activity manipulation (a standard measure from the accounting literature), which we show is higher under hometown auditors.

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Suggested Citation

Chu, Jian and Fisman, Raymond and Tan, Songtao and Wang, Yongxiang, Hometown Ties and the Quality of Government Monitoring: Evidence from Rotation of Chinese Auditors (April 2020). NBER Working Paper No. w27032, Available at SSRN: https://ssrn.com/abstract=3588152

Jian Chu (Contact Author)

Nanjing University - School of Business ( email )

22 Hankou Road
Nanjing, Jiangsu 210093 210093
China

Raymond Fisman

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Songtao Tan

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

Yongxiang Wang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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