Government Regulation, Ownership Structure And Auditor Choice

Since China re-established its CPA profession in 1980, CPA industry has experienced re-construct period, stable development period, disaffiliation period and expand period, in which government has made a series of regulations in cultivating auditing demand and promoting auditing quality. However, the independent auditing market is still dominated by buyers. Therefore, research on the incentives of auditor choice in Chinese transiting economy has important implications, which not only related to how to stimulate independent auditing demand and promote the benign development of auditing market, but also related to the perfection of corporate governance and the healthy development of capital market.With a sample of A-share listed corporations from 2001 to 2004, this dissertation develops a theoretical framework for studying on auditing demand in China, which is based on Chinese institutional background and existing literature, and intend to test the following questions empirically from perspectives of government behavior and property rights: (1) Whether there is quality differenciation among CPA firms in China? (2) What's the role of governments in auditor choice? And how agency problems caused by ownership structure influence auditor choice? (3) Could market observe and identify the auditor choice behavior?This dissertation finds that:1. By investigating quality differentiation from information transparency perspective, the results indicate that, there is systematic difference of auditing quality among auditing firms. Accounting information transparency of big4's clients is significantly higher than that of non-big4, while the evidence is weak for domestic CPA firms.2. By investigating on the incentives of choosing different auditors from view of ownership structure and government ownership, the results show that, both government regulation and ownership structure have influences on auditor choice, which can be showed in the following results: firstly, firms controlled by central government have incentives to choose high quality auditors, while firms controlled by local government have incentives to choose local small auditors, and private firms have incentives to choose national-level auditors; secondly, there is a non-linear relationship between ownership concentration and auditing quality demand; finally, the agency costs between management and shareholders are positively related to high quality auditing demand. These results indicate that, currently in China, there are both economic incentives and regulation incentives on auditor choice, government both play grabbing hand and helping hand roles on auditing demand..3. By investigating the economic consequences auditor choice from perspective of equity capital cost, the results indicate that, among corporations with high information asymmetry, the cost of equity capital for corporations audited by high quality auditors is significantly lower than that of corporations audited by small auditors. These findings indicate that the function of auditing is recovering in our transit economy, corporations can lower their capital cost by choosing high quality auditors.The innovations and contributions of this dissertation mainly lie in its method and conclusions. On methodology, this paper uses piece-wise linear regression, curvilinear regression and 2-stage OLS regression. On research questions and conclusion, this paper firstly establishes a brand-new theoretical framework for research on auditing demand in Chinese market; secondly, this paper investigates governments role in auditor choice; thirdly, this paper investigates the influences of ownership structure on corporation behaviors; lastly but not the least, this paper is the first one that use accounting information transparency to measure auditing quality, and provide evidence for the role of independent auditing in valuation.