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Journal of International Accounting, Auditing and Taxation 18 (2009) 44–Contents lists available at ScienceDirect
Journal of International Accounting,
Auditing and Taxation
The impact of corporate governance on auditor choice:Evidence from China
Z. Jun Lina,∗, Ming Liub
a Department of Accountancy and Law, Hong Kong Baptist University, 代写留学生论文Kowlong Tong, Kowloon, Hong Kong, China
b Department of Accounting and Information Management, The University of Macau, Macau, China
a r t i c l e i n f o
Keywords:
Corporate governance Auditor choice Chinese capital market Opaqueness gains
a b s t r a c t
As the largest and fastest growing emerging market, China is becoming more and moreimportant to investors throughout the world. The purpose of this paper is to investigatethe determinants of firms’ auditor choice in China in respect of their corporate governance
mechanism. Normally firms have to take a trade-off in their auditorchoice decisions, i.e.,to hire high-quality auditors to signal effective audit monitoring and good corporate governance
to lower their capital raising costs, or to select low-quality auditors with less effectiveaudit monitoring in order to reap private benefits derived fromweak corporate governanceand less-transparent disclosure (the opaqueness gains).We develop a logit regression model
to test theimpact of firms’ internal corporate governancemechanism on auditor choice decisionsmade by IPO firms getting listed during a bear market period of 2001–2004 in China.Three variables are used to proxy for firms’ internal corporategovernance mechanism, i.e.,
the ownership concentration, the size of the supervisory board (SB), and the duality ofCEO and chairman of board of directors (BoDs). We classify all auditors in China into largeauditors (Top 10) and others (non-Top 10), assuming the large auditors can provide higher
quality audit services. The empirical results show that firms with larger controlling shareholders,with smaller size of SB, or in which CEO and BoDs chairman are the same person,are less likely to hire a Top 10 (high-quality) auditor. This suggests that when benefits from
lowering capital raising costs are trivial, firms with weaker internal corporate governancemechanism are inclined to choose a low-quality auditor so as to capture and sustain theiropaqueness gains. On the other hand, with improvement of corporate governance, firms
should be more likely to appoint high-quality auditors.
© 2009 Published by Elsevier Inc.
1. Introduction
The purpose of this study is to investigate the association between firms’ internal corporate governance mechanism and
their auditor choice decisions in China. Auditor choice, i.e., client–auditor alignment, can be viewed as the minimum cost
match between client needs (the demand side) and auditor services (the supply side) in a certain auditing environment
(Datar, Feltham, & Hughes, 1991). Studies on auditor choice to date have been conducted predominantly in the U.S. (Chow
& Rice, 1982; Copley & Douthett, 2002; Copley, Gaver, & Gaver, 1995; DeAngelo, 1982; Geiger, Raghunandan, & Rama, 1998;
Hogon, 1997; Hudaib & Cooke, 2005; Johnson & Lys, 1990; Krishnan, 1994; Lee, Mande, & Ortman, 2004; Pittman & Fortin,
2004), with occasional studies in countries such as Australia (Beatty, 1989; Craswell, 1988), New Zealand (Firth, 1999; Firth
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