Underwriter–Auditor Relationship and Pre-IPO Earnings Management: Evidence from China

Xingqiang Du (), Xu Li (), Xuejiao Liu () and Shaojuan Lai ()
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Xingqiang Du: Xiamen University
Xu Li: The University of Hong Kong
Xuejiao Liu: University of International Business and Economics
Shaojuan Lai: Xiamen National Accounting Institute

Journal of Business Ethics, 2018, vol. 152, issue 2, No 4, 365-392

Abstract: Abstract This study examines the influence of underwriter–auditor relationship (UAR) on pre-initial public offering (IPO) earnings management. Using a sample of Chinese to-be-listed firms, we find that a close UAR, as reflected in repeated collaborations between an underwriter and an audit firm in IPOs, is positively associated with pre-IPO earnings management. This association is more pronounced for firms with politically connected auditors/underwriters, firms with less reputable auditors/underwriters, firms located in provinces with weak legal environment, firms to-be-listed on boards with lax listing requirements, and firms whose auditors are with low industry specialization, and legal liability exposures. We provide further evidence that UAR is associated with greater likelihood of irregular activities in post-IPO period and poorer post-IPO financial performance. To the extent that we control for alternative explanations and potential endogeneity, our results suggest that the collusion incentive is likely to drive repeated collaborations between underwriters and auditors in the Chinese IPO market. Our findings provide interesting implications for auditors, investors, and regulators seeking to understand the Chinese IPO market.

Keywords: Underwriter–auditor relationship (UAR); Earnings management; The collusion incentive; Political connections; Underwriter (auditor) reputation; Legal environment (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s10551-016-3278-4

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