Articlegreen2007

On the Association between Changes in Corporate Ownership and Changes in Auditor Quality in a Transitional Economy

Koon Hung Chan · Kenny Z. Lin · Fang Zhang

62 citations0/0 files storedJournal of International Accounting Research

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

This study uses agency theory to test whether the demand for quality-differentiated audits by listed Chinese companies is systematically associated with changes in ownership structure, which is characterized by the dominance of government and institutional owners in a transitional economy. Our empirical test results are supportive of agency theory. Specifically, we find that a decrease of government shares and a corresponding increase of institutional shares lead to a general increase in the demand for higher-quality audits in China's stock market. However, the influence of individual shareholders on a firm's auditor-choice decisions appears insignificant. Our results suggest that in the absence of institutional features typically found in freemarket economies that provide incentives for managers to supply credible accounting information via quality audits, the introduction of large institutional blockholders can be a good alternative for a transitional economy.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1997A Survey of Corporate Governance 1987The Economic Institutions of Capitalism 1980Agency Problems and the Theory of the Firm 1986Large Shareholders and Corporate Control 1981Auditor size and audit quality 1985Positive Accounting Theory 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*

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