Social security contributions, financing constraints and demand for higher audit quality-evidence from China

ABSTRACT

This paper discusses the impact and mechanism of corporate social security contributions on the demand for higher audit quality. The study finds that social security contributions increase high-quality audit demand of firms. The mechanism is found to be that social security contributions motivate firms to raise capital by increasing financing constraints, and then firms choose high-quality audit services to strive for financing. Heterogeneity analysis shows that the impact of social security contributions on the demand for higher audit quality is more significant in non-state-owned firms and firms with higher labour intensity. The above findings respond to audit demand signalling theory in terms of theoretical and empirical data and provide thinking for better understanding the effects of social security contributions.

KEYWORDS:

• Social security contributions
• financing constraints
• demand for higher audit quality
• audit demand signalling theory

JEL CLASSIFICATION:

• M41
• M42
• J30

Disclosure statement

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

Notes

¹ Taking pensions as an example, the China Pension Actuarial Report 2019–2050 points out that the current balance of the basic pension insurance for urban workers in 2019–2050 starts to be negative after maintaining a positive figure for several years, and the scale of the deficit is getting larger. Without considering financial subsidies, the current balance of the pension insurance fund is already negative in 2019, and the balance is expected to be −16.73 trillion yuan in 2050.

² KZ = −1.002× CF+0.283× TBQ+3.139× LEV-39.368× DIV-1.315× CASH. CF is the ratio of net cash flow of operating activities to the total assets of the previous period; TBQ is Tobin’s Q value; LEV is asset-liability ratio; DIV is the ratio of current dividend to the total assets of the previous period; CASH is the ratio of cash holding to the total assets of the previous period.

³ WW = −0.091× CF1-0.062× DIV1-0.044× SIZE-0.035× GROWTH+0.021× LEV1+0.102× ISG. CF1 is the ratio of net cash flow of operating activities to total assets; DIV1 is the dummy variable of whether dividends are paid; SIZE is the size of a company; GROWTH is the growth rate of sales revenue; LEV1 is long-term liabilities to total assets; ISG is the growth rate of industry sales.