The Impact Of Ultimate Ownership Structure On Audit Quality Empirical Evidence From Chinese Listed Companies

In recent years, Chinese capital market develops rapidly, all kinds of systems continue to become mature, with the introduction of the mandatory audit requirement, engaging an accounting firm for audit service becomes an necessary link of the listed company. Audit quality is extremely important, because as an important supervision mechanism of external market, high-quality audit service can reduce the information asymmetry and mitigate the proxy conflicts between listed companies and external investors and regulators. However, the frequent audit scandals lead to people's trust crisis, and stagnant audit quality has became a stumbling block which affects the development of capital market in China. Many previous studies show that ownership structure is a key factor affecting audit quality, owning to the fact that ultimate ownership structure can reflect the company's ownership structure deeper, the relationship between ultimate ownership structure and audit quality gradually attracts the attention of regulators and investors.This paper studies the relationship between ultimate ownership structure and audit quality from theoretical and empirical aspects. In the part of theoretical analysis, based on theories of corporate governance and ownership structure, this paper theoretically deduces how ultimate ownership structure influences audit quality, including both the control-cash flow rights divergence and nature of ultimate controlling shareholders. In the part of empirical test, using audit fees to measure audit quality and controlling firm characters, corporate governance, legal environment, macro economy and other related variables, this paper builds seven empirical models, adopts panel data containing related continuously obtainable information of424non-financial companies listed in Shanghai and Shenzhen from year2006to2010(totally2120observed values) and applies pooled least square to investigate the impact of the ultimate ownership structure on audit quality. In addition, this paper also uses brand scale of accounting firms to measure audit quality and applies logistic method to test the stability of empirical results.To be specific:(1) The impact on audit quality of the control-cash flow rights divergence of ultimate controlling shareholders. No matter what way we use to measure control-cash flow rights divergence, the coefficient of one-time item of control-cash flow rights divergence is positive, but the quadratic coefficient of control-cash flow rights divergence is negative. This shows that the ultimate controlling shareholder's control-cash flow rights divergence and audit quality are inverted U-shaped curve, that is to say, when the control-cash flow rights divergence is small, motivate effect gets the better, ultimate controlling shareholders have enough intention to buy high-quality audit service by the reason that high-quality audit service can increase corporate transparency, improve the image, convey a positive signal to investors to attract more investments and prepare long-term interests for controlling shareholders; when the control-cash flow rights divergence is big, entrenchment effect gets the better, by the reason that high-quality audit service means to share proprietary information with other shareholders, which will greatly affect the acquisition of follow-up private interests, controlling shareholders won't want to buy high-quality audit service, leading to the lack of demand for high-quality audit service.(2) The impact on audit quality of ultimate controlling shareholders' nature. The proxy variables'coefficients of ultimate controlling shareholders' nature are significantly negative, this shows that compared with those companies whose ultimate controller are non-state-owned enterprises, companies ultimately controlled by state-owned enterprises are willing to pay less audit fees because of the existence of many disadvantages like owner absence, longer proxy chains and government intervention.Considering the special institutional background in China, this study explores factors which affecting audit quality deeper, supplies new knowledge about the behavior of ultimate controlling shareholders in Chinese special legal background, and provides a reference for future research. In addition, according to the results of empirical tests, this paper puts forward some suggestions on how to improve audit quality, promote the development of capital markets and protect the interests of investors.