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

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.