Financial investment by non-financial firms: does it affect audit quality?

Litan Wang, Kefei You () and Hui Chen
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Litan Wang: Shanghai Lixin University of Accounting and Finance
Kefei You: University of Greenwich
Hui Chen: Shanghai Lixin University of Accounting and Finance

Journal of Management & Governance, 2025, vol. 29, issue 3, No 4, 699-733

Abstract: Abstract In the context of the global trend of increasing financial investment by non-financial firms, this study investigates how this process affects the audit quality of these firms. Employing data of Chinese listed non-financial firms from 2011 to 2020, we first examine whether the increasing proportion of financial assets in the total assets has an adverse impact on the audit quality of these firms. We then analyze the mediation effect of operational volatility on such impact by adopting the mediation test of the modified Sobel’s z and the bootstrap test. We find that a higher proportion of financial assets to total assets lowers the audit quality, confirming that the financialization of non-financial firms deteriorates their audit quality. Furthermore, the mediation tests show that operational volatility is an important channel for this negative effect.

Keywords: Financial investment; Audit quality; Financialization; State ownership; Big 4 and non-big 4 (search for similar items in EconPapers)
JEL-codes: C10 G11 G32 M42 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10997-024-09714-y

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