Empirical Analysis The Motivation And Consequences Of Diversified Company Auditor Choice

As the diversification can reduce enterprise risk, enhance enterprise debt cap-acityand have an positive effect on internal capital markets,With the continuous developmentof economic globalization，many enterprises choose diversified man-agement to expandthe scale of the enterprise and reduce the risk of enterprise. However, though, itsnegative impact should not be overlooked. Research shows that there is a widespreadphenomenon of discount in the diversified company. From the motive of implementingdiversification strategy, the study found that t-he company agency conflicts between themanagement and the owners is an imp-ortant reason that cause the diversificationdiscount.With the implementation of the strategy of diversification, the informationasymmetry is more serious. The deepening of information asymmetry provide moreopportunities for management to seek private gain, which will increase the agency costand coordination cost, and then damage the company value. In the listed company withthe separation between ownership and control, shareholders often do not have enoughpower to supervise managers, then executive will hand control of the company and formthe insider control. Therefore, if independent external supervision can not implementbetter monitoring of management, managers will get individual personal intereststhrough diversified management. And that will damage firm value and causephenomenon of discount in the diversified company.Existing research shows that Based on the agency cost theory, many studiehaveinvestigated how internal governance mechanisms such as characteristics o-f the boardof directors, ownership structure, etc. influence the company’s diversification strategyand the diversification discount. However, little research focuses on this mechanism caneffectively slow down the agency of diversified compa-ny. Such as Gonzalo&Stefan(2010) found that although debt can effectively control efficacy to reduce the company’saccrual manipulation, but the effect on i-nhibition of diversified company manipulateaccrued is not significant, the reason for this is that the complexity of the diversifiedcompany’s business and financial information makes it hard for creditors have enoughinformation to supervise. Obviously, in order to alleviate the agency problem ofdiversified company,more effective governance mechanism will be needed.Audit demand information theory believe that audit can improve the quality offinancial information and effectively dispose financial resources through the signaltransmission. Independent audit collect the necessary audit evidence by means of theimplementation of audit procedures, then comment whether the financial statements is fair. In the agency theory, the independent audit can effectively enhance the credibilityof the accounting information and reduce information asymmetry between shareholdersand managers and reduce agency cost. It is generally believed that large publicaccounting firms are more likely to identify and find diversified company earningsmanagement problems by investing more money in information technology and industryexpertise. But so far our country has little research about diversified company auditorchoice behavior and high quality audit’s impact on diversified company’s agency costand value.Therefore based on the sample of the listed companies from2003to2011, westudy the diversified company’s behavior of auditor choice, as well as the impact ofhigh-quality audit on the diversified company’s agency cost and value. By establishingregression model we found: firstly, the company agency cost is an important reason whydiversified company choose high quality audit. Company with higher agency costs ismore likely to choose high-quality audit. Secondly, high quality external audit have asignificant impact on the value of the diversified company. The high quality audit caneffectively reduce agency costs and ease the diversified discount, then improve thecompany value. Thirdly, the control properties can affect the relationship between thecompany diversification discount and high quality audit. Further test shows that highquality external audit more can restrain diversified discount and more significantlyimprove the company’s value for non-governmental control the diversified company.But for state-owned diversified company, high quality external audit can notsignificantly influence the company value, that is for the state-owned diversifiedcompany, high quality audit can not effectively restrain the company’s discount.This paper concrete structure is as follows: The first part is introduction, includingbackground, purpose, meaning and the basic framework; The second part is the reviewof literature, including domestic literature review and foreign literature review;Thethird part is basic theory of the relationship between high quality audit and high qualityaudit. It includes audit demand motivation theory, diversification motivation theories,diversification discount theory and agency cost theory;The forth part is the theoryanalysis and hypothesis; The fifth part is data description and the empirical analysis;The last part is conclusions and recommendations.