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Controlling Shareholder’s Share Pledging and Firm’s Auditor Choice

Controlling Shareholder’s Share Pledging and Firm’s Auditor Choice This study investigates auditor choice in firms whose shares are pledged by their controlling shareholders as collateral for margin loans to financial institutions. To cope with risks arising from share pledging, controlling shareholders can be divided in choosing an auditor in terms of auditor quality—with some who might engage in financial reporting manipulation prefer a low-quality report while the others favor a higher quality to alleviate minority shareholder’s potential concerns. Using detailed data of Chinese listed-firms from 2007 to 2016, we find that it is less likely for firms with share pledging controlling shareholders to employ Top 10 audit firms. Further tests show that the reporting quality of pledge firms choosing non-Top 10 audit is poorer, but the audit opinion is not worse. Besides, higher audit fee for pledge firms suggests that controlling shareholders’ share pledging is considered to be with higher audit risk by auditor. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Emerging Markets Finance & Trade Taylor & Francis

Controlling Shareholder’s Share Pledging and Firm’s Auditor Choice

Emerging Markets Finance & Trade , Volume 56 (4): 21 – Mar 15, 2020

Controlling Shareholder’s Share Pledging and Firm’s Auditor Choice

Emerging Markets Finance & Trade , Volume 56 (4): 21 – Mar 15, 2020

Abstract

This study investigates auditor choice in firms whose shares are pledged by their controlling shareholders as collateral for margin loans to financial institutions. To cope with risks arising from share pledging, controlling shareholders can be divided in choosing an auditor in terms of auditor quality—with some who might engage in financial reporting manipulation prefer a low-quality report while the others favor a higher quality to alleviate minority shareholder’s potential concerns. Using detailed data of Chinese listed-firms from 2007 to 2016, we find that it is less likely for firms with share pledging controlling shareholders to employ Top 10 audit firms. Further tests show that the reporting quality of pledge firms choosing non-Top 10 audit is poorer, but the audit opinion is not worse. Besides, higher audit fee for pledge firms suggests that controlling shareholders’ share pledging is considered to be with higher audit risk by auditor.

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References (30)

Publisher
Taylor & Francis
Copyright
Copyright © Taylor & Francis Group, LLC
ISSN
1558-0938
eISSN
1540-496X
DOI
10.1080/1540496X.2018.1549030
Publisher site
See Article on Publisher Site

Abstract

This study investigates auditor choice in firms whose shares are pledged by their controlling shareholders as collateral for margin loans to financial institutions. To cope with risks arising from share pledging, controlling shareholders can be divided in choosing an auditor in terms of auditor quality—with some who might engage in financial reporting manipulation prefer a low-quality report while the others favor a higher quality to alleviate minority shareholder’s potential concerns. Using detailed data of Chinese listed-firms from 2007 to 2016, we find that it is less likely for firms with share pledging controlling shareholders to employ Top 10 audit firms. Further tests show that the reporting quality of pledge firms choosing non-Top 10 audit is poorer, but the audit opinion is not worse. Besides, higher audit fee for pledge firms suggests that controlling shareholders’ share pledging is considered to be with higher audit risk by auditor.

Journal

Emerging Markets Finance & TradeTaylor & Francis

Published: Mar 15, 2020

Keywords: auditor choice; controlling shareholder; share pledging

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