A Research On The Listed Companies' Audit Firm Choice Behavior In Chinese IPO Market

Independent audit is a mechanism to reduce agency cost. Theoretically speaking, a company's demand for audit quality changes with its agency cost. The higher the agency cost, the higher the company's motivation to hire high quality audit. Jensen and Meckling (1976) analyze the agency problem between insiders and outsiders. They find that if insiders introduce external regulation system (e.g. external audit, budget etc.) into the company, the company's value will increase.According to Yuan Hongqi and Li Haijian (2003), as IPO companies'special risk increases, hiring high quality auditors can bring more marginal benefit than hiring low quality auditors. However, the marginal cost of the former may also be higher. Domestic research about audit market is primarily focused on the behavior of the supply side. However, in the game between the audit service supplier (audit firm) and purchaser (listed company), audit firm is at a subordinate position. In general, the case is that listed companies choose audit firms, but not the reverse, which makes the research on listed companies'audit firm choice behavior important.Chinese security market is an emerging market. In a country with imperfect regulation system, it is still possible to get efficient external audit. This dissertation analyzes listed companies'auditor choice behavior in the IPO audit market mainly for two reasons. The first, the shift of audit firms brings communication costs between the listed company and its new auditor and invokes regulators'attention; therefore, once the company hires an audit firm, it seldom shifts. The second, an IPO company's audit firm choice always presents its first choice toward an audit firm in the listing process, which can show the company's demand for audit product under a general case.This dissertation is aimed at discussing the effects of government intervention, costs and benefits factors and companies'special risks on companies'audit firm choice behavior in Chinese IPO market and testing the demand for audit's information function and insurance function. Therefore, the study is concentrated on three aspects: the first, describing the market demand characteristics and system background in Chinese IPO audit market; the second, testing and illustrating the factors of audit firm choice behavior in Chinese IPO market; the third, testing and analyzing the economic motivation of IPO companies'auditor choice, which is to test the demand for audit's information function and insurance function through empirical analysis.The dissertation is composed of 6 chapters. Besides the introduction and conclusion, the remaining chapters are classified into 3 parts.The first part refers to Chapter 2, which analyzes the behavior subjects in IPO audit market and IPO companies'demand for external audit from the perspective of accountability.The second part refers to Chapter 3, which discusses relating system background. Based on the analysis of the development trend in Chinese audit demand market, the paper further expatiates on the government characteristics in the IPO audit system.The third part refers to Chapter 4 and Chapter 5, which describes and tests the factors affecting IPO companies'audit firm choices and the effects of information function as well as insurance function on the demand for audit in the IPO market.Chapter 4 shows that in Normal firm group, results of the selectivity analysis are identical to cost-minimization hypothesis. Further studies on conditional expected costs again testify that the actual audit quality choice in the Normal group is cost-minimized. However, the selectivity coefficient of Famous firm group is not significant. Moreover, if IPO companies choose normal firm, state– owned is positively associated to total costs, while private– owned is negatively related to total costs. The controlling shareholder structure is insignificant with respect to total costs in Famous firm group.Chapter 5 indicates the demand for audit's function through studies on IPO companies'audit firm choices. Based on the differentiation of audit's information function and insurance function, Chapter 5 further discusses the influence of the new auditing standards issued in 2006 on audit function in the IPO market. Results show that in Chinese IPO market, the demand for audit is primarily in its information function but not insurance function. Moreover, the issuance of the new auditing standards imposed a positive effect on enhancing quality of Chinese domestic audit firms.The innovations of this dissertation are as the following:Firstly, the dissertation focuses on audit demand in the IPO market and systematically analyzes the market characteristics as well as its development trend of audit demand in IPO market. This study examines the combined effects of market factors and government intervention on voluntary demand for audit in IPO market. Results show that IPO companies'risk characteristics, actual control rights and their tradeoff between costs and benefits factors can affect their voluntary choices of audit firms. This study demonstrates the effectiveness of external audit and extends existing literature by showing evidence on voluntary demand for audit functions in an emerging market.Secondly, on the basis of accountability theory, this dissertation probes to establish a theory frame for IPO companies'audit firm choice behavior and illustrates the importance of audit in the IPO market through a theoretical perspective, which realizes the extension of accountability and audit control in the fields of IPO audit.Thirdly, this dissertation introduces IPO companies'actual control rights and some specific characteristics in Chinese IPO audit market to modify the self– selection model.The last, this dissertation initially shows evidence on the influence of the new auditing standards on the demand for audit functions in the IPO market. Results indicate that the issuance of the new auditing standards imposed a positive effect on enhancing quality of domestic audit firms.