Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from China

• 成果类型: Article
• 署名作者: Chen, Hanwen; Chen, Jeff Zeyun; Lobo, Gerald J.; Wang, Yanyan
• 署名单位: Xiamen University; University of Colorado System; University of Colorado Boulder; University of Houston System; University of Houston
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/j.1911-3846.2011.01088.x
• 发表日期: 2011
• 页码: 892-+
• 关键词: CORPORATE GOVERNANCE; INSTITUTIONAL ENVIRONMENT; big 4; INFORMATION; RISK; performance; services; proxies; BOARD; FIRMS

摘要

We examine the effects of audit quality on earnings management and cost of equity capital for two groups of Chinese firms: state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). The differences in the nature of the ownership, agency relations and bankruptcy risks lead SOEs to have weaker incentives than NSOEs to engage in earnings management. As a result, the effect of audit quality in reducing earnings management will be greater for NSOEs than for SOEs. In addition, investors' pricing of information risk as reflected in the cost of equity capital will be more pronounced for NSOEs than for SOEs with high and low audit quality. We find empirical evidence consistent with these hypotheses. Our findings indicate that (1) while high-quality auditors play a governance role in China, that role is limited to a subset of firms, and (2) even under the same legal jurisdiction, the effects of audit quality (in the form of lower earnings management and cost of equity capital) vary across firms with different ownership structures. Our study extends prior research by focusing on the economic consequences of SOEs' and NSOEs' auditor choices and underscores the importance of controlling for ownership type when conducting audit research.