On the association between changes in corporate ownership and changes in auditor quality in a transitional economy

This study uses agency theory to test whether the demand for quality-differentiated audits by listed Chinese companies is systematically associated with changes in ownership structure, which is characterized by the dominance of government and institutional owners in a transitional economy. Our empirical test results are supportive of agency theory. Specifically, we find that a decrease of government shares and a corresponding increase of institutional shares lead to a general increase in the demand for higher-quality audits in China's stock market. However, the influence of individual shareholders on a firm's auditor-choice decisions appears insignificant. Our results suggest that in the absence of institutional features typically found in free-market economies that provide incentives for managers to supply credible accounting information via quality audits, the introduction of large institutional blockholders can be a good alternative for a transitional economy.