This study examines factors impacting ethical behavior of 208 employees of a Chinese state-owned steel company. Only rules climate had a significant impact on ethical behavior of respondents. Other ethical climate types such as professional, caring, instrumental, independence, and efficiency did not impact ethical behavior of respondents. Ethical behavior of peers, ethical behavior of successful managers, and overclaiming had a significant impact on ethical behavior of subjects.

This study examines the influence of auditor-CEO surname sharing on financial misstatement and further investigates whether the above effect depends on hometown relationship and the rarity of surnames, respectively. Using hand-collected data from China, the findings show that ACSS is significantly positively related to financial misstatement, suggesting that the auditor-CEO ancestry membership elicits the collusion and increases the likelihood of financial misstatement. Moreover, ACSS based upon hometown relationship leads to significantly higher likelihood of financial misstatement, compared with ACSS without hometown (...) relationship. Furthermore, the positive relation between ACSS and financial misstatement is more pronounced for rare surnames than for common surnames. The above findings are robust to sensitivity tests on the basis of different measures of ACSS and financial misstatement, and my conclusions are still valid after using the propensity score matching approach to address the endogeneity concerns. (shrink)

This study examines the influence of underwriter–auditor relationship on pre-initial public offering 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. (shrink)

Using the presence of at least one client with net-income-increasing misstatement as a signal of low audit quality for an audit firm, this study examines the existence of the contagion effect of low audit quality and further investigates whether financial distress and investment opportunity as two firm-specific financial characteristics moderate the contagion effect of low audit quality. Using a sample of 7887 firm-year observations from the Chinese stock market over the period of 2007–2012, our study documents strong and consistent evidence (...) to show that other clients audited by low-quality audit firms have significantly higher discretionary accruals ; financial distress reinforces the contagion effect of low audit quality; investment opportunity strengthens the contagion effect of low audit quality; the contagion effect of low audit quality persists over subsequent years for clients, and both financial distress and investment opportunity reinforce the contagion effect of misstatement to future misstatement. Above results are robust to a variety of sensitivity tests and are still valid after using the change model to control for the potential endogeneity. This study extends the previous literature on the contagion effect of low audit quality across audit firms. (shrink)

In the Chinese stock market, controlling shareholders often use inter-corporate loans to expropriate a great amount of cash from listed firms, through a process called “tunneling.” Using a sample of 10,170 firm-year observations from the Chinese stock market for the period of 2001–2010, I examine whether and how Buddhism, China’s most influential religion, can mitigate tunneling. In particular, using firm-level Buddhism data, measured as the number of Buddhist monasteries within a certain radius around Chinese listed firms’ registered addresses, this study (...) provides strong evidence that Buddhism intensity is significantly negatively associated with tunneling. This finding is consistent with the view that Buddhism has important influence on corporate behavior and can serve as a set of social norms and/or an alternative mechanism to mitigate controlling shareholders’ unethical tunneling behavior. In addition, my findings also reveal that the negative association between Buddhism intensity and tunneling is attenuated for firms that have high analyst coverage. The results are robust to various measures of Buddhism intensity and a variety of sensitivity tests. (shrink)

Using a sample of Chinese to-be-listed firms during the period of 2006–2012, this study examines the influence of CEO-auditor dialect sharing (CADS) on pre-IPO audit quality and further investigates the moderating effects of auditor reputation and audit firm industry specialization. On the basis of information in personal identification cards, this study hand-collects data about CADS, and then provides strong and consistent evidence to show that CADS is significantly positively related with discretionary accruals (the inverse proxy for audit quality), suggesting that (...) CADS leads to the collusion between the CEO and the signing auditors, elicits pre-IPO earnings management, and eventually impairs pre-IPO audit quality. Moreover, both auditor reputation and audit firm industry specialization attenuate the positive effect of CADS on discretionary accruals. Furthermore, sensitivity tests suggest that above findings are robust to different measures of CADS and discretionary accruals, and above conclusions still stand after controlling for the endogeneity. Lastly, the findings using the post-IPO sample further validate the negative association between CADS and pre-IPO audit quality. (shrink)

This study examines the influence of corporate environmental performance on the propensity that auditors issue modified audit opinions and further investigates the moderating effects of internal control and greenwashing. Using a sample of Chinese listed firms, our findings reveal that corporate environmental performance is significantly negatively associated with modified audit opinions, suggesting that auditors applaud environmentally friendly firms. Moreover, internal control reinforces the negative association between corporate environmental performance and modified audit opinions, but greenwashing attenuates the negative effect of corporate (...) environmental performance on modified audit opinions. The findings are robust to various sensitivity tests, and our conclusions are still valid after controlling for the potential endogeneity. Additional tests reveal that corporate environmental performance is negatively associated with modified audit opinions only for firms without audit opinion shopping and corporate environmental performance is significantly negatively associated with both earnings management and audit fees. (shrink)