The Negative Effect of Regional Banking Competition on Audit Quality: Evidence from China

ABSTRACT

Using Chinese A-share listed data from 2007 to 2020, we reveal that increased competition in the banking system impairs the audit quality of banks’ credit clients, which is attributed to the loss of bank supervision. For firms with poor corporate governance or information quality, firms that hire auditors with low independence or high catering motivation, or firms in an immature external environment, such negative effect is more prominent. Furthermore, we indicate that firms are prone to shop for favorable audit opinions under high banking competition. Overall, we illustrate the negative effect of banking competition on auditors and provide meaningful implications.

KEYWORDS:

• Regional banking competition
• auditor conservatism
• emerging market

JEL:

• M42
• G21

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. http://www.cbirc.gov.cn/cn/view/pages/govermentDetail.html?docId=1002746&itemId=863&generaltype=1

2. The Interstate Banking and Branching Efficiency Act (IBBEA).

3. After entropy balancing, the mean, variance, and skewness for matching covariate variables in the treatment and control groups are similar to each other, which means we have successfully achieved the covariate balance between the two groups. Due to limited space, we do not report the details of the balancing process here.

4. Wang, Xiaolu, China’s Provincial Marketization Index Report: 2018. 2019, Social Sciences Academic Press.

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [71902030, 71932003].