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Staying or switching: How companies react to audit firm penalties

Kexin Zhang, Danglun Luo, Pengfei Gao Orcid Logo

International Review of Economics & Finance, Volume: 104, Start page: 104639

Swansea University Author: Pengfei Gao Orcid Logo

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DOI (Published version): 10.1016/j.iref.2025.104639

Abstract

We investigate the relationship between corporate governance characteristics and the change ofpenalized audit firms based on financing, reputation, and client relationship perspectives. Basedon a sample of client companies of penalized audit firms in China between 2008 and 2023, wefind that companie...

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Published in: International Review of Economics & Finance
ISSN: 1059-0560
Published: Elsevier BV 2025
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URI: https://cronfa.swan.ac.uk/Record/cronfa70462
first_indexed 2025-09-23T19:57:59Z
last_indexed 2025-10-31T18:12:14Z
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spelling 2025-10-30T13:29:13.3232618 v2 70462 2025-09-23 Staying or switching: How companies react to audit firm penalties bd00b4a498e1c45d25e0fcdab1838b26 0009-0008-7818-1231 Pengfei Gao Pengfei Gao true false 2025-09-23 CBAE We investigate the relationship between corporate governance characteristics and the change ofpenalized audit firms based on financing, reputation, and client relationship perspectives. Basedon a sample of client companies of penalized audit firms in China between 2008 and 2023, wefind that companies with financing incentives and good reputations tend to change penalizedaudit firms, while companies with close “audit firm-client” relationships tend to maintaincooperation. The above conclusion still stands after a series of endogeneity and robustness tests.Heterogeneity tests indicate that the intensity of the China Securities Regulatory Commission(CSRC)’s penalties, the company’s level of real earnings management, and the nature of propertyrights all affect the company’s decision to change the penalized audit firm. Further research findsthat the company’s continued cooperation with the penalized audit firm can harm its accountinginformation quality and accounting conservatism. The findings of our study enrich the existingresearch on the factors influencing the change of penalized audit firms in emerging markets. Journal Article International Review of Economics &amp; Finance 104 104639 Elsevier BV 1059-0560 Audit firm change; Administrative penalty; Financing constraints; Corporate reputation; Client relationship 1 12 2025 2025-12-01 10.1016/j.iref.2025.104639 COLLEGE NANME Management School COLLEGE CODE CBAE Swansea University Other Kexin Zhang acknowledges the financial support from Xinjiang Tianchi Talents Young Doctoral Program (Xin HRSSDL[2024] No. 104). 2025-10-30T13:29:13.3232618 2025-09-23T20:51:05.1006732 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Kexin Zhang 1 Danglun Luo 2 Pengfei Gao 0009-0008-7818-1231 3 70462__35505__d3c960d82f7c4c949da00f3097ffb2b6.pdf 70462.VoR.pdf 2025-10-30T13:26:30.5896937 Output 1229591 application/pdf Version of Record true © 2025 Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license. true eng http://creativecommons.org/licenses/by-nc-nd/4.0/
title Staying or switching: How companies react to audit firm penalties
spellingShingle Staying or switching: How companies react to audit firm penalties
Pengfei Gao
title_short Staying or switching: How companies react to audit firm penalties
title_full Staying or switching: How companies react to audit firm penalties
title_fullStr Staying or switching: How companies react to audit firm penalties
title_full_unstemmed Staying or switching: How companies react to audit firm penalties
title_sort Staying or switching: How companies react to audit firm penalties
author_id_str_mv bd00b4a498e1c45d25e0fcdab1838b26
author_id_fullname_str_mv bd00b4a498e1c45d25e0fcdab1838b26_***_Pengfei Gao
author Pengfei Gao
author2 Kexin Zhang
Danglun Luo
Pengfei Gao
format Journal article
container_title International Review of Economics &amp; Finance
container_volume 104
container_start_page 104639
publishDate 2025
institution Swansea University
issn 1059-0560
doi_str_mv 10.1016/j.iref.2025.104639
publisher Elsevier BV
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
document_store_str 1
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description We investigate the relationship between corporate governance characteristics and the change ofpenalized audit firms based on financing, reputation, and client relationship perspectives. Basedon a sample of client companies of penalized audit firms in China between 2008 and 2023, wefind that companies with financing incentives and good reputations tend to change penalizedaudit firms, while companies with close “audit firm-client” relationships tend to maintaincooperation. The above conclusion still stands after a series of endogeneity and robustness tests.Heterogeneity tests indicate that the intensity of the China Securities Regulatory Commission(CSRC)’s penalties, the company’s level of real earnings management, and the nature of propertyrights all affect the company’s decision to change the penalized audit firm. Further research findsthat the company’s continued cooperation with the penalized audit firm can harm its accountinginformation quality and accounting conservatism. The findings of our study enrich the existingresearch on the factors influencing the change of penalized audit firms in emerging markets.
published_date 2025-12-01T05:27:26Z
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score 11.090091

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