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Hometown favoritism and the quality of government monitoring: Evidence from rotation of Chinese auditor

Jian Chu (), Raymond Fisman (), Songtao Tan () and Yongxiang Wang ()
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Jian Chu: Nanjing University
Raymond Fisman: Boston University
Songtao Tan: Renmin University of China
Yongxiang Wang: University of Southern California, Shanghai Advanced Institute of Finance, Shanghai Jiaotong University, Shanghai

No dp-343, Boston University - Department of Economics - The Institute for Economic Development Working Papers Series from Boston University - Department of Economics

Abstract: Audits are a standard mechanism for reducing corruption in government investments. The quality of audits themselves, however, may be affected by relationships between auditor and target. We study whether provincial chief auditors in China show greater leniency in evaluating prefecture governments in their hometowns. In city-fixed-effect specifications – in which the role of shared background is identified from auditor turnover – we show that hometown auditors find 38 percent less in questionable monies. This hometown effect is similar throughout the auditor’s tenure, and is diminished for audits ordered by the provincial Organizations Department as a result of the departure of top city officials. We argue that our findings are most readily explained by favoritism rather than an endogenous response by local officials to concerns of better enforcement by hometown auditors. We complement these city-level findings with firm-level analyses of earnings manipulation by state-owned enterprises via real activity manipulation (a standard measure from the accounting literature), which we show is higher under hometown auditors.

Keywords: Social Ties; Audit quality; State-owned enterprise; Government investment; China (search for similar items in EconPapers)
JEL-codes: D73 G3 M42 H83 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2020-02
New Economics Papers: this item is included in nep-acc, nep-cna, nep-tra and nep-ure
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http://faculty.marshall.usc.edu/Yongxiang-Wang/Audit_AEJ_r1wtables.pdf

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