Ultimate Ownership Structure, Inverstor Legal Protection And Audit Quality

Audit plays an important role in reducing information asymmetry and mitigating agency problems. But, audit services if can play an effective role depends on audit quality. While in China which country’s market economic less than forty years, in the process of rapid economic development and economic transformation, more and more companies have appeared audit failure and financial fraud cases, and have brought huge obstacles to the healthy development of Chinese capital market. There are many factors affecting audit quality, one of the important factors is ownership structure, but the domestic and foreign scholars’researches of the relationship between ownership structure and audit quality focused on the direct ownership how to influence audit quality, for example, managers shareholding, shareholders properties, the ownership concentration and so on, these researches didn’t back to the relationship between the company’s ultimate ownership structure and audit quality. However, more and more empirical researches have found that most of the countries’listed companies’shareholding is usually concentrated in the hands of the ultimate controlling shareholders, agency problem of these companies mainly is the ultimate agent conflict between controlling shareholders and the outside investors, the listed companies in China are the same. At the same time, in recent years with the rise of the "law and finance’boom", gradually the company’s financial research field by the introduction of the investor legal protection. Due to the historical and institutional reasons, lack of the investor legal protection in China, further exacerbating the agent conflict and the information asymmetry problem between the ultimate controlling shareholders and the outside investors. So, under the background of the Chinese characteristic system, in order to reveal the ultimate ownership structure, investor protection’s mechanism of audit quality, it’s necessary for us to answer the following questions:First of all, the ultimate ownership structure how to affect audit quality? Second, the investor protection if helps to improve the audit quality? Third, if the investor legal protection can affect the relationship between the ultimate ownership structure and the audit quality and how to affect this relationship?Controlling related variables, the paper adopts unbalanced panel data (5767 observations in total) containing 967 non-financial companies listed in Shanghai and Shenzhen from 2008 to 2013, uses the absolute values of discretionary accruals which are calculated by the adjusted cross-sectional Jones model as audit quality’s reverse proxy index, and applies series of pooled models to empirically examine how the ultimate ownership structure, and investor legal protection affects audit quality, and how investor legal protection affects the relationship between the ultimate ownership structure and audit quality. The results show that:(1) Cash flow rights of ultimate controlling shareholders is significantly positively correlated with audit quality; (2) Control-cash rights divergence of ultimate controlling shareholders is significantly negatively correlated with audit quality;(3) Compared with those companies whose ultimate controller are non-state-owned enterprises, the companies which are ultimately controlled by state-owned enterprises have relatively higher audit quality; (4) Investor legal protection is significantly positively correlated with audit quality; (5) Interactive variables of control-cash flow rights divergence of ultimate controlling shareholders and investor legal protection is significantly positively correlated with audit quality, improvement of the level of investor legal protection can weaken the negative relationship between control-cash flow rights divergence and audit quality; (6) In the poor investor legal protection provinces, control-cash flow rights divergence of ultimate controlling shareholders is significantly negatively correlated with audit quality, but in the good investor legal protection provinces, control-cash flow rights divergence of ultimate controlling shareholders is still negatively correlated with audit quality, however this negative relationship is no longer significant.