External auditor types and the cost stickiness of listed companies

Figures & data

Table 1. Sample selection process.

Year	Initial observations	Listed less than 2 years	Financial companies	Firms with extreme changes in income or expense (0.5%)	Missing data	Remaining observations
2002	1,211	150	7	64	56	934
2003	1,278	138	7	71	43	1,019
2004	1,377	167	8	88	34	1,080
2005	1,366	115	10	88	55	1,098
2006	1,421	81	10	98	65	1,167
2007	1,537	192	14	107	52	1,172
2008	1,611	203	17	47	72	1,272
2009	1,703	176	30	80	82	1,335
2010	2,050	448	30	80	75	1,417
Total	13,554	1,670	133	723	534	10,494

Table 2. Variable definitions.

Type	Variables name	Variables symbol	Variables definition
Dependent variable	Changes in the costs	∆Cost	Natural logarithm of the ratio of the expense in year t to the expense in year t–1
Independent variables	Changes in operating income	∆Income	Natural logarithm of the ratio of the operating income in year t to the operating income in year t–1
	Income declining	Income_decrease	Dummy variable that equals 1 if operating income in year t is lower than that in year t–1, and equals 0 otherwise
	The Big Four International	Big4	Dummy variable that equals 1 if the firm is audited by Big Four International, 0 otherwise
	The Big Ten Domestic	Domestic_big10	Dummy variable that equals 1 if the firm is audited by Big Ten Domestic, 0 otherwise
Control variables	Income declining for two consecutive years	Two_year_decrease	Dummy variable that equals 1 if the operating income declines for two consecutive years, and equals 0 otherwise
	Economic growth	GDP_growth	GDP growth for year t
	Human capital intensity	Employee_intensity	Number of employees/operating revenue (in millions)
	Fixed capital intensity	Fixed_asset_intensity	Total assets/operating revenue
	Financial leverage	Leverage	Debts/assets
	Marketisation index	Marketisation_index	Marketisation index (Fan et al., 2010)
	Proportion of independent directors	Independent_director	Proportion of independent directors
	CEO duality	Duality	Dummy variable that equals 1 if the CEO and Chairman are the same one, otherwise 0
	Proportion of management shareholdings	Managerial_share	Proportion of shares held by managers

Table 3. Descriptive statistics.

Panel A: Full sample
Variables symbol	Mean	Lower quartile	Median	Upper quartile	Standard deviation
∆Cost	0.133	–1.499	0.132	1.752	0.375
∆Income	0.145	–1.525	0.141	2.151	0.391
Income_decrease	0.256	0.000	0.000	1.000	0.436
Big4	0.057	0.000	0.000	1.000	0.231
Domestic_big10	0.335	0.000	0.000	1.000	0.472
Two_year_decrease	0.096	0.000	0.000	1.000	0.295
GDP_growth	10.726	9.100	10.100	14.200	1.618
Employee_intensity	2.717	0.023	1.700	28.418	3.503
Fixed_asset_intensity	2.717	0.304	1.794	36.022	3.630
Leverage	0.506	0.062	0.515	0.957	0.186
Marketisation_index	8.060	0.630	7.920	11.710	2.202
Independent_director	0.346	0.000	0.333	0.600	0.073
Duality	0.096	0.000	0.000	1.000	0.295
Managerial_share	0.005	0.000	0.000	0.273	0.028

Panel B: Sub-sample
	Big Four International		Big Ten Domestic		Non-Big Ten Domestic		Big Four International–Non-Big Ten Domestic
Variables symbol	Mean	Median	Mean	Median	Mean	Median	Mean	Median
∆Cost	0.145	0.127	0.138	0.133	0.128	0.132	0.98	1.44
∆Income	0.165	0.154	0.145	0.144	0.145	0.138	0.76	0.08
Income_decrease	0.189	0.000	0.260	0.000	0.259	0.000	–3.84***	–3.83***
Two_year_decrease	0.057	0.000	0.093	0.000	0.101	0.000	–3.30***	–3.29***
GDP_growth	10.647	10.100	10.630	10.100	10.786	10.100	–1.22	–1.47
Employee_intensity	1.657	0.994	2.239	1.508	3.079	1.886	–7.60***	–10.87***
Fixed_asset_intensity	2.261	1.605	2.503	1.670	2.877	1.893	–3.15***	–4.37***
Leverage	0.471	0.478	0.517	0.531	0.503	0.512	–4.74***	–4.87***
Marketisation_index	8.826	8.960	8.580	8.660	7.703	7.420	8.74***	8.88***
Independent_director	0.341	0.333	0.355	0.333	0.342	0.333	–1.88*	–1.24
Duality	0.057	0.000	0.103	0.000	0.096	0.000	–3.29***	–3.29***
Managerial_share	0.001	0.000	0.006	0.000	0.004	0.000	–3.39***	–0.75

Note:

For definitions of the variables, please refer to Table 2.

^*** ,

^** ,

^* indicate significance levels of 1%, 5% and 10% respectively

Table 4. Correlation coefficients.

	A	B	C	D	E	F	G	H	I	J	K	L	M
(A) ∆Cost	1
(B) ∆Income	0.294^***	1
(C) Income_decrease	–0.200^***	–0.536^***	1
(D) Big4	0.007	0.010	–0.037^***	1
(E) Domestic_big10	0.009	–0.001	0.008	–0.174^***	1
(F) Two_year_decrease	–0.142^***	–0.344^***	0.556^***	–0.032^***	–0.008	1
(G) GDP_growth	–0.073^***	0.045^***	–0.088^***	–0.012	–0.042^***	–0.040^***	1
(H) Employee_intensity	–0.042^***	–0.246^***	0.178^***	–0.074^***	–0.098^***	0.220^***	–0.057^***	1
(I) Fixed_asset_intensity	–0.058^***	–0.353^***	0.244^***	–0.031^**	–0.042^***	0.267^***	–0.042^***	0.410^***	1
(J) Leverage	0.048^***	0.047^***	0.005	–0.046^***	0.043^***	–0.005	0.043^***	–0.026^**	–0.006	1
(K) Marketisation_index	–0.047^***	–0.019	0.029^**	0.085^***	0.168^***	0.003	0.124^***	–0.261^***	–0.066^***	–0.012	1
(L) Independent_director	–0.031^**	0.016	–0.005	–0.018	0.087^***	–0.025^*	0.117^***	–0.129^***	–0.027^**	0.021^*	0.223^***	1
(M) Duality	0.005	–0.000	–0.009	–0.032^**	0.017	–0.005	0.001	0.011	0.007	–0.031^**	0.038^***	0.020^*	1
(N) Managerial_share	0.026^**	0.012	–0.031^**	–0.033^***	0.036^***	–0.033^***	–0.015	–0.024^*	–0.034^***	–0.081^***	0.144^***	0.071^***	0.161^***

Note:

For definitions of the variables, please refer to Table 2.

^*** ,

^** ,

^* indicate significance levels of 1%, 5% and 10% respectively.

Table 5. Types of external auditors and the cost stickiness.

	(1) Full sample	(2) Full sample	(3) The Big Four	(4) The Big Ten Domestic	(5) Others domestic	(6) Full sample	(7) Full sample
	0.309***	0.294***	0.351***	0.332***	0.274***	0.294***	0.294***
	(10.68)	(10.10)	(3.51)	(6.69)	(7.40)	(10.10)	(10.08)
∆Income*Income_decrease	–0.151***	–0.145**	0.076	–0.116	–0.153**	–0.148***	–0.169***
	(–3.01)	(–2.57)	(0.48)	(–1.45)	(–2.14)	(–2.61)	(–2.71)
∆Income*Income_decrease*Big4						0.214*	0.238*
						(1.70)	(1.84)
						0.024**	0.031***
						(2.20)	(2.71)
∆Income*Income_decrease *Domestic_big10							0.086 (1.27)
Domestic_big10							0.020***
							(2.68)
Two_year_decrease		–0.085***	–0.041	–0.078***	–0.086***	–0.085***	–0.083***
		(–4.86)	(–0.57)	(–3.08)	(–3.77)	(–4.83)	(–4.82)
GDP_growth		–0.022***	0.014	–0.022***	–0.025***	–0.022***	–0.022***
		(–5.43)	(1.26)	(–2.65)	(–4.95)	(–5.35)	(–5.40)
Employee_intensity		0.001	–0.008	0.001	0.001	0.001	0.001
		(0.39)	(–1.50)	(0.34)	(0.28)	(0.42)	(0.38)
Fixed_asset_intensity		0.002	0.017***	0.003	0.002	0.002	0.002
		(1.04)	(2.84)	(1.03)	(0.52)	(1.03)	(1.08)
Leverage		0.075***	0.114	0.046	0.082***	0.076***	0.074***
		(3.81)	(1.56)	(1.55)	(2.86)	(3.85)	(3.73)
Marketisation_index		–0.005***	–0.001	–0.007***	–0.005**	–0.005***	–0.005***
		(–3.09)	(–0.19)	(–2.89)	(–2.13)	(–3.20)	(–3.39)
Independent_director		–0.099*	–0.159	–0.108	–0.095	–0.099*	–0.100*
		(–1.70)	(–1.12)	(–1.01)	(–1.21)	(–1.70)	(–1.72)
Duality		0.001	0.044*	–0.004	0.003	0.001	0.001
		(0.12)	(1.83)	(–0.26)	(0.19)	(0.14)	(0.13)
Managerial_share		0.436***	1.131***	0.497***	0.417***	0.442***	0.445***
		(5.07)	(3.61)	(4.18)	(3.59)	(5.12)	(5.22)
Constant	0.139***	0.137***	0.057	0.165***	0.140***	0.137***	0.134***
	(8.74)	(4.93)	(0.84)	(3.31)	(3.71)	(4.90)	(4.82)
Year	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Observations	10,494	10,494	593	3,520	6,381	10,494	10,494
Adjusted R^2	0.101	0.107	0.130	0.157	0.088	0.107	0.108
F value (model)	34.15	27.62	7.737	14.67	14.71	26.14	25.08
F value (∆Income* Income_decrease)			(3) vs (5)=1.48

Note:

For definitions of the variables, please refer to Table 2.

^*** ,

^** ,

^* indicate significance levels of 1%, 5% and 10% respectively.

Table 6. Types of external auditors, agency costs and the expense stickiness.

	(1) High stake of major shareholders	(2) Low stake of major shareholders	(3) High level of marketisation	(4) Low level of marketisation
∆Income	0.332***	0.241***	0.271***	0.317***
	(7.67)	(5.88)	(7.37)	(6.98)
∆Income*Income_decrease	–0.161	–0.137*	–0.109	–0.217**
	(–1.27)	(–1.83)	(–1.38)	(–2.38)
∆Income*Income_decrease*Big4	0.011	0.690***	0.079	0.717**
	(0.09)	(2.98)	(0.77)	(2.36)
Big4	0.011	0.064***	0.030**	0.028
	(0.77)	(3.43)	(2.49)	(1.14)
∆Income*Income_decrease *Domestic_big10	0.172 (1.47)	0.059 (0.71)	0.035 (0.40)	0.150 (1.20)
Domestic_big10	0.018*	0.021*	0.010	0.032***
	(1.77)	(1.81)	(1.04)	(2.71)
Two_year_decrease	–0.048	–0.103***	–0.084***	–0.077***
	(–1.54)	(–4.64)	(–3.97)	(–2.84)
GDP_growth	–0.017***	–0.027***	–0.014**	–0.027***
	(–3.21)	(–3.89)	(–2.07)	(–4.53)
Employee_intensity	–0.001	0.002	0.000	0.001
	(–0.50)	(0.65)	(0.05)	(0.34)
Fixed_asset_intensity	0.004	0.002	0.003	0.002
	(1.09)	(0.72)	(1.02)	(0.54)
Leverage	0.040	0.101***	0.045*	0.103***
	(1.42)	(3.51)	(1.82)	(3.21)
Marketisation_index	–0.009***	–0.002	–0.010***	–0.005
	(–4.09)	(–0.93)	(–2.75)	(–1.04)
Independent_director	–0.102	–0.110	–0.068	–0.125
	(–1.15)	(–1.28)	(–0.95)	(–1.36)
Duality	0.011	–0.004	0.008	–0.006
	(0.68)	(–0.30)	(0.54)	(–0.33)
Managerial_share	0.490***	0.510***	0.516***	0.151
	(2.89)	(5.16)	(6.70)	(0.68)
Constant	0.174***	0.114**	0.180***	0.123**
	(4.38)	(2.56)	(3.59)	(2.52)
Year	Yes	Yes	Yes	Yes
Observations	5,249	5,245	5,263	5,231
Adjusted R^2	0.150	0.078	0.126	0.095
F value (model)	15.24	12.79	18.28	11.89
F value (∆Income* Income_decrease)	(1) vs (2) = 6.46**		(3) vs (4) = 4.01**

Note:

For definitions of the variables, please refer to Table 2.

^*** ,

^** ,

^* indicate significance levels of 1%, 5% and 10% respectively.

Table 7. Test using the PSM method.

	(1) Full sample	(2) High stake of major shareholders	(3) Low stake of major shareholders	(4) High level of marketisation	(5) Low level of marketisation
∆Income	0.469***	0.479***	0.485***	0.453***	0.487***
	(8.94)	(5.27)	(11.54)	(7.62)	(4.35)
∆Income*Income_decrease	–0.431***	–0.420**	–0.629***	–0.163	–0.531**
	(–3.21)	(–2.44)	(–3.18)	(–0.88)	(–2.45)
∆Income*Income_decrease*Big4	0.306*	0.144	0.753***	–0.035	0.848*
	(1.81)	(0.92)	(2.87)	(–0.19)	(1.96)
Big4	–0.014	–0.038*	0.047	–0.010	–0.018
	(–0.81)	(–1.84)	(1.63)	(–0.51)	(–0.56)
Two_year_decrease	0.028	0.130*	–0.181**	0.006	0.087
	(0.50)	(1.75)	(–2.57)	(0.12)	(0.64)
GDP_growth	0.001	–0.006	0.020	0.016	–0.015
	(0.10)	(–0.56)	(1.42)	(1.29)	(–0.99)
Employee_intensity	–0.005	–0.004	–0.005	–0.001	–0.005
	(–0.99)	(–0.71)	(–0.90)	(–0.13)	(–0.77)
Fixed_asset_intensity	0.005	0.005	0.009	0.012**	–0.001
	(1.04)	(0.92)	(0.89)	(2.05)	(–0.12)
Leverage	0.010	–0.003	–0.006	0.060	–0.017
	(0.16)	(–0.04)	(–0.06)	(0.89)	(–0.13)
Marketisation_index	–0.006	–0.010*	0.004	–0.016	0.000
	(–1.25)	(–1.66)	(0.51)	(–1.63)	(0.00)
Independent_director	–0.139	–0.015	–0.473**	–0.160	–0.090
	(–1.02)	(–0.09)	(–2.08)	(–0.90)	(–0.41)
Duality	0.065*	0.051	0.103**	0.060	0.068
	(1.77)	(1.04)	(2.03)	(1.19)	(1.60)
Managerial_share	–0.539	–3.056***	–0.391	–0.414	–0.817***
	(–1.27)	(–3.90)	(–0.95)	(–0.58)	(–2.65)
Constant	0.140**	0.158**	0.081	0.171	0.125
	(2.22)	(2.05)	(0.73)	(1.56)	(0.98)
Year	Yes	Yes	Yes	Yes	Yes
Observations	1,084	725	359	641	443
Adjusted R^2	0.179	0.143	0.298	0.254	0.101
F value (model)	6.908	4.905	13.89	8.414	45.14
F value (∆Income* Income_decrease)		(2) vs (3) = 3.86**		(4) vs (5) = 4.17**

Note:

For definitions of the variables, please refer to Table 2.

^*** ,

^** ,

^* indicate significance levels of 1%, 5% and 10% respectively.

Table 8. Test on industrial listed companies.

	(1) Full sample	(2) High stake of major shareholders	(3) Low stake of major shareholders	(4) High level of marketisation	(5) Low level of marketisation
∆Income	0.328***	0.334***	0.305***	0.324***	0.329***
	(6.82)	(5.54)	(3.56)	(5.13)	(4.83)
∆Income*Income_decrease	–0.121	–0.007	–0.122	–0.140	–0.107
	(–1.22)	(–0.06)	(–0.91)	(–1.17)	(–0.73)
∆Income*Income_decrease*Big4	0.561**	0.301	0.700**	0.387	0.750**
	(2.47)	(1.04)	(2.33)	(1.62)	(2.48)
Big4	0.018	–0.006	0.042**	0.026*	0.001
	(1.26)	(–0.35)	(2.06)	(1.73)	(0.05)
∆Income*Income_decrease *Domestic_big10	0.052 (0.47)	–0.011 (–0.09)	0.063 (0.45)	0.054 (0.42)	0.041 (0.19)
Domestic_big10	0.017*	0.006	0.024*	0.015	0.021
	(1.93)	(0.54)	(1.75)	(1.31)	(1.51)
Two_year_decrease	–0.062***	–0.020	–0.083***	–0.070**	–0.054
	(–2.81)	(–0.57)	(–2.85)	(–2.40)	(–1.60)
GDP_growth	–0.023***	–0.021***	–0.024**	–0.016*	–0.028***
	(–4.53)	(–2.94)	(–2.57)	(–1.77)	(–4.01)
Employee_intensity	–0.001	–0.004	0.001	–0.001	–0.002
	(–0.34)	(–1.05)	(0.29)	(–0.13)	(–0.60)
Fixed_asset_intensity	0.007	0.008	0.007	0.003	0.010
	(1.41)	(1.43)	(1.07)	(0.69)	(1.28)
Leverage	0.057**	0.019	0.089**	0.024	0.081**
	(2.32)	(0.57)	(2.40)	(0.72)	(2.19)
Marketisation_index	–0.004**	–0.008***	–0.001	–0.013***	0.000
	(–1.97)	(–2.80)	(–0.18)	(–2.83)	(0.05)
Independent_director	–0.063	–0.089	–0.051	–0.100	–0.028
	(–0.78)	(–0.72)	(–0.47)	(–0.97)	(–0.23)
Duality	–0.010	–0.001	–0.015	–0.003	–0.017
	(–0.66)	(–0.04)	(–0.75)	(–0.14)	(–0.79)
Managerial_share	0.329***	0.305	0.382***	0.441***	–0.060
	(3.30)	(1.43)	(3.29)	(4.65)	(–0.38)
Constant	0.132***	0.198***	0.072	0.239***	0.082
	(3.46)	(3.93)	(1.18)	(3.50)	(1.40)
Year	Yes	Yes	Yes	Yes	Yes
Observations	6,236	3,295	2,941	2,830	3,406
Adjusted R^2	0.106	0.128	0.086	0.138	0.089
F value (model)	14.33	8.998	7.523	11.65	7.891
F value (∆Income* Income_decrease)		(2) vs (3) = 0.88		(4) vs (5) = 1.00

Note:

For definitions of the variables, please refer to Table 2.

^*** ,

^** ,

^* indicate significance levels of 1%, 5% and 10% respectively.

Table 9. Control for discretionary accruals.

	(1) Full sample	(2) High stake of major shareholders	(3) Low stake of major shareholders	(4) High level of marketisation	(5) Low level of marketisation
∆Income	0.304***	0.358***	0.240***	0.270***	0.348***
	(10.63)	(8.56)	(5.85)	(7.36)	(7.99)
∆Income*Income_decrease	–0.170***	–0.177	–0.130**	–0.104	–0.237***
	(–3.00)	(–1.42)	(–1.97)	(–1.36)	(–3.11)
∆Income*Income_decrease*DA	0.773***	0.488	0.846***	0.350	1.322***
	(3.84)	(1.47)	(3.37)	(1.58)	(3.84)
DA	–0.021	–0.091	0.016	0.019	–0.091
	(–0.38)	(–1.27)	(0.18)	(0.31)	(–0.97)
∆Income*Income_decrease*Big4	0.207	–0.020	0.645***	0.070	0.651**
	(1.63)	(–0.16)	(2.96)	(0.68)	(2.44)
Big4	0.029**	0.009	0.062***	0.029**	0.022
	(2.56)	(0.62)	(3.38)	(2.44)	(0.92)
∆Income*Income_decrease *Domestic_big10	0.063 (0.98)	0.105 (0.85)	0.066 (0.82)	0.030 (0.36)	0.077 (0.63)
Domestic_big10	0.020***	0.016	0.022*	0.010	0.029**
	(2.62)	(1.58)	(1.89)	(1.06)	(2.43)
Two_year_decrease	–0.085***	–0.050	–0.107***	–0.087***	–0.076***
	(–5.01)	(–1.62)	(–4.80)	(–4.06)	(–2.86)
GDP_growth	–0.022***	–0.017***	–0.026***	–0.014**	–0.027***
	(–5.32)	(–3.28)	(–3.81)	(–2.06)	(–4.58)
Employee_intensity	–0.001	–0.002	0.000	–0.000	–0.001
	(–0.31)	(–0.90)	(0.18)	(–0.13)	(–0.49)
Fixed_asset_intensity	0.002	0.004	0.002	0.003	0.000
	(1.12)	(1.11)	(0.80)	(1.17)	(0.09)
Leverage	0.058***	0.022	0.086***	0.042*	0.065**
	(2.93)	(0.77)	(3.07)	(1.70)	(1.99)
Marketisation_index	–0.005***	–0.009***	–0.002	–0.010***	–0.005
	(–3.58)	(–4.16)	(–1.05)	(–2.78)	(–1.06)
Independent_director	–0.098*	–0.089	–0.119	–0.068	–0.120
	(–1.70)	(–1.00)	(–1.43)	(–0.95)	(–1.34)
Duality	0.003	0.011	–0.002	0.008	–0.000
	(0.27)	(0.65)	(–0.12)	(0.55)	(–0.02)
Managerial_share	0.449***	0.530***	0.497***	0.517***	0.137
	(5.27)	(3.26)	(4.95)	(6.77)	(0.60)
Constant	0.143***	0.175***	0.129***	0.183***	0.141***
	(5.29)	(4.57)	(2.99)	(3.63)	(3.07)
Year	Yes	Yes	Yes	Yes	Yes
Observations	10,481	5,244	5,237	5,262	5,219
Adjusted R^2	0.117	0.162	0.086	0.128	0.114
F value (model)	25.48	15.74	13.02	17.16	13.65
F value (∆Income* Income_decrease)		(2) vs (3) = 6.71***		(4) vs (5) = 4.28**

Note:

DA is discretionary accruals, which is calculated following Dechow et al. (1995). The other variables are defined in Table 2.

^*** ,

^** ,

^* indicate significance levels of 1%, 5% and 10% respectively.

Fan, G., Wang, X. L., & Zhu, H. P. (2010). Marketization index for China’s provinces (2009), Economic Science Press ( in Chinese).

 Google Scholar

Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.

 Web of Science ®Google Scholar