Can Mandatory Dual Audit Reduce the Cost of Equity? Evidence from China

Forthcoming in Accounting and Business Research

54 Pages Posted: 27 Feb 2021

See all articles by Rui ZHANG

Rui ZHANG

Northwest University - School of Economics and Management

Raymond M. K. Wong

City University of Hong Kong (CityU) - Department of Accountancy

Agnes W. Y. Lo

Lingnan University

Gaoliang TIAN

Xi'an Jiaotong University (XJTU) - School of Management

Date Written: February 27, 2021

Abstract

In China, a mandatory dual audit system for domestic A-share firms cross-listed on the Hong Kong stock market (i.e. AH companies) was abolished in 2010. Since then, AH companies have been allowed to choose to have a dual audit or a single audit. We find that the mandatory dual audit regime before the deregulation is associated with a lower cost of equity than voluntary dual audit after the deregulation. Furthermore, the lower cost of equity under the mandatory dual audit regime is greater in companies exposed to stronger financial constraints and with higher agency costs, and is not attenuated by alternative voluntary audits. Our results are not affected by accounting standards convergence and audit quality, and are robust to various model specifications. Our results suggest that the role of mandatory dual audit in mitigating agency costs and information asymmetry is not replaceable by voluntary dual audit.

Keywords: mandatory dual audit, deregulation, compliance, cost of equity, China

JEL Classification: G31, G32, M42

Suggested Citation

ZHANG, Rui and Wong, Raymond M. K. and Lo, Agnes W. Y. and TIAN, Gaoliang, Can Mandatory Dual Audit Reduce the Cost of Equity? Evidence from China (February 27, 2021). Forthcoming in Accounting and Business Research, Available at SSRN: https://ssrn.com/abstract=3756101

Rui ZHANG

Northwest University - School of Economics and Management ( email )

Xian, Shaanxi 029
China

Raymond M. K. Wong

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

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Agnes W. Y. Lo

Lingnan University ( email )

Department of Accountancy
Tuen Mun
Hong Kong
Hong Kong

Gaoliang TIAN (Contact Author)

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

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