SUMMARY This study investigates the impact of large shareholder incentives on firms' auditor choice using a quasi-natural experiment setting provided by the split share structure reform in China. The reform converted the previously non-tradable shares held by large shareholders into tradable shares and thus enhanced the alignment of large shareholders' and outside investors' interests. We find that firms switch from large auditors to small auditors following the completion of the reform. The results are robust to the audit firm merging effect and the firm fixed effects. Further analyses reveal that the effect is more pronounced in firms with greater agency costs prior to the reform and in firms located in a weak legal environment. Taken together, these results suggest that a reduction in conflicts between large shareholders and outside investors leads to a declining demand for high-quality audits. JEL Classifications: M42; G34. Data Availability: Data are available from the public sources cited in the text.
Several explanations of why mutual insurers choose to demutualize their businesses are examined with a recent survey of mutual insurers. This study adds to the literature by surveying mutual insurers' executives on those factors that would lead them to demutualize their companies. Both univariate and multivariate techniques are applied to analyze those responses. Demutualization is most strongly influenced by access to capital markets, increased organizational flexibility, and the chance for company officers to increase their pay, as prior literature has suggested.
Using data of Chinese A-share non-financial listed companies spanning years 2003-2018, we examine whether a firm's business strategy that deviates from industry conventions influences corporate governance mechanisms, particularly the probability of choosing high-quality external auditors. We document a significantly positive correlation between a firm's strategic deviance and high-quality auditor engagement. The exacerbation of agency conflict is an important driver for firms with strategic deviance to hire highquality auditors. Moreover, we find evidence that hiring Big 4 auditors can curb earnings management and capital occupation of major shareholders in firms with a deviant strategy. We conclude that strategically deviant firms hire high-quality auditors due to agency conflicts.
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