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We examine which of two opposing financial reporting incentives that group-affiliated firms experience shapes their accounting transparency evident in auditor choice. In one direction, complex group structure and intragroup transactions enable controlling shareholders to pursue diversionary activities that they later hide by distorting reported earnings. In the other direction, as outside investors price-protect against potential expropriation, controlling shareholders may be eager to improve financial reporting quality in order to alleviate agency costs. To empirically clarify whether group affiliation affects company insiders' incentives to address minority shareholders' concerns over agency costs, we examine auditor selection of group firms relative to stand-alone firms. In comparison to nongroup firms, our evidence implies that group firms are more likely to appoint Top 10 audit firms in China, especially when their controlling shareholders have stronger incentives to improve external monitoring of the financial reporting process. After isolating group firms, we find that the presence of a Top 10 auditor translates into higher earnings and disclosure quality, higher valuation implications for related-party transactions, and cheaper equity financing, implying that these firms benefit from engaging a high-quality auditor. In additional analysis consistent with our predictions, we find that group firms that are Top 10 clients pay higher audit fees and their controlling shareholders are more constrained against meeting earnings benchmarks through intragroup transactions and siphoning corporate resources at the expense of minority investors. Collectively, our evidence supports the narrative that insiders in firms belonging to business groups weigh the costs and benefits stemming from auditor choice. *Accepted by Joseph Carcello. We are especially grateful to Joseph Carcello and two anonymous referees for their insightful and detailed comments that have significantly improved our paper. We thank Long Chen, Lauren Dreher, Rebecca Hann, Jayanthi Krishnan, Clive Lennox, Adi Masli, Oliver Rui, Stephen Taylor, and Martin Wu for their insights into an earlier version of this paper. Our paper has also benefited from comments from participants at the 2013 Auditing Midyear Conference in New Orleans, the 2013 AAA Annual Meeting in Anaheim, the 5th DC Area Accounting Symposium at George Mason University, and

SUMMARY Using data from the Chinese market where related party transactions (RPTs) are particularly prevalent, we examine how the independent auditor responds to the potentially heightened risk of RPTs and the efficacy of the auditor's response. First, we find that the auditor is more likely to issue a modified audit opinion that specifically discusses RPTs (RPTMAO) to firms reporting higher related sales or related lending, but not to firms reporting higher RPTs of other categories (i.e., related purchases, related borrowing, and related assets/equity transactions). These findings suggest that the auditor alerts investors to the possibility of earnings management and/or expropriation risk from related sales or related lending through audit opinions. The positive relation between related sales and RPTMAO is driven by related sales with nonmarket-based or undisclosed pricing policy and related sales above the industry average. Second, RPTMAO has robust predictive power for future RPT-related restatements, and the predictive power is greater than that of modified opinions that do not specifically discuss RPTs, suggesting that the auditor is effective at communicating the risk associated with RPTs through opinion modifications, especially RPTMAOs. JEL Classifications: M49 Data Availability: Data used in this study are available from public sources.

Manuscript Type: EmpiricalResearch Question/Issue: This study investigates the moderating role of CEO overpayment on the relationship between firm performance and CEO dismissal. We also examine how contextual factors, including compensation disclosure regulation, firm index status, and firm age, influence board attention and attribution, and consequently affect the sensitivity of CEO dismissal to firm performance. Research Findings/Insights: Using a sample of Chinese listed firms between 2002 and 2011, we find that overpaid CEOs are associated with a larger likelihood of dismissal in case of poor firm performance compared to their underpaid counterparts. In addition, CEO overpayment has a larger influence on the turnover-performance relationship when executive compensation disclosure is mandatory, when a firm is index-included, or younger. Theoretical/Academic Implications: This study provides empirical support for attribution theory and the attention-based view. Built on the concept of bounded rationality, it demonstrates that board sense-making and causal attributions affect the CEO dismissal decision. Our study also sheds light on the influence of situational cues on shaping board attention and subsequent corporate governance decisions. Practitioner/Policy Implications: This study offers insights to policymakers interested in enhancing the design of corporate governance mechanisms by paying attention to cognitive processes in the boardroom.

PurposeThe purpose of this paper is to empirically investigate the impact of economic policy uncertainty on firms' labor investment decision, which includes labor investment level and efficiency, especially human capital allocation.Design/methodology/approachThis paper uses Economic Policy Uncertainty Index for China and Chinese A-share listed firms in the period 2002–2016 to constructs a sample of 20,779 firm-year observations and applies the methods of pooled OLS regressions to do an empirical study.FindingsThis paper finds that firms' labor investment is negatively correlated with economic policy uncertainty. And firms' labor investment efficiency (and overinvestment in labor) is positively (negatively) correlated with economic policy uncertainty, which is more significant for non-SOEs and firms with less government intervention. Further, the positive relation between economic policy uncertainty and labor investment efficiency is more significant for labor-intensive firms, firms in competitive industry, firms in developed labor market and firms under strong labor law protection. In addition, economic policy uncertainty induces firms to make adjustment on human capital structure and allocate more employees with high human capital, which eventually helps firms achieve higher total factor productivity.Social implicationsThe study of this paper indicates that the government needs to consider economic policies' impact on firms when introducing and changing policies and guide firms to improve human capital allocation under different internal and external conditions to finally realize the optimal allocation of social resources.Originality/valueThis paper studies the influence of external economic policy environment on firms' labor investment decision, which lacks adequate attention in the literature and indicates that under economic policy uncertainty, firms actively decrease labor demand and increase labor investment efficiency by optimizing human capital allocation.