Asia-Pacific Journal of Accounting & Economics

Tentative Publishing Plan for 2017

Volume 24, Issue No. 1 & 2, March and June 2017

  • Lihong Wang and Philip T. Lin*, Who benefits from political connections? Minority investors or controlling shareholders, 1-22
  • Chan Lyu, Desmond Chun Yip Yuen & Xu Zhang*, Individualist-Collectivist Culture, Ownership Concentration and Earnings Quality, 23-42
  • Sung Hwan Jung*, The Contingent Effect of Analyst Coverage: How Does Analyst Coverage Affect Innovation and Tobin’s Q?, 43-67
  • Wen-Bin Chuang, To-Han Chang* & Hui-lin Lin, Does Stronger Intellectual Property Rights Protection Matter in Developing Local R&D Outsourcing Strategy?, 68-82
  • Susumu Cato*The Optimal Tariff Structure and Foreign Penetration, 83-94
  • Katsufumi Fukuda*The effects of globalization on regional inequality in a model  of semi-endogenous growth and footloose capital, 95-105
  • Chia-Hui Lu & Yu Pang*, An anatomy of China’s eco-efficiency gains: the role of FDI, 106-126
  • Catherine Heyjung Sonu, Hyejin Ahn* & Ahrum Choi, Audit Fee Pressure and Audit Risk: Evidence from the Financial Crisis of 2008, 127-144
  • Koki Arai*, Ex-post Examination of Mergers: Effects on Retail Prices, 145-162
  • Seon Mi Kim & Yura Kim*, Product Market Competition on the Effectiveness of Internal Control, 163-182
  • Shengbao Zhai, Lu Xie* & Sheng Zhang*, Bank Connections and Corporate Risk-taking: Evidence from China, 183-194
  • Il-Hang Shin, Ho-Young Lee*, Hyun-Ah Lee & Myungsoo Son, How Does Human Resource Investment in Internal Control Affect Audit Reporting Lag?, 195-215
  • Takafumi Sasaki*, Pension accruals and share prices: Evidence from the amortization costs of transition amounts, 216-231
  • Shirley J. Ho*, Credibility of Voluntary Disclosure in Financial Firms, 232-247


Who benefits from political connections?
Minority investors or controlling shareholders

Lihong Wang, Xiamen University
Philip T. Lin, Shantou University

Using a sample of Chinese privately controlled firms listed on the Shanghai Stock Exchange during 2003–2012, this paper empirically examines the relation between politically connected independent directors and firm value creation and value expropriation. Our empirical results show that having politicians as independent directors helps listed privately controlled firms to increase subsidies received from the government as well as obtain an ease of access to long-term bank financing. In contrast, we discern that a large fraction of politically connected independent directors increases the magnitude of related-party transactions between the listed firms and their controlling parties, suggesting wealth expropriating from minority shareholders. Finally, when exploring the net effects of political connections, the presence of politically connected independent directors promotes firm profitability and adds residual value to Chinese listed privately controlled firms.

Keywords: Political connections, value creation, value expropriation, independent directors, minority investors

JEL classification: G32, G34, M14


Individualist-Collectivist Culture, Ownership Concentration and Earnings Quality

Chan Lyu, Macau University of Science and Technology
Desmond Chun Yip Yuen, University of Macau
Xu Zhang*, University of Macau

In this study we explore the effects of individualist-collectivist culture, an important dimension of national cultures, on the entrenchment incentives of large shareholders. Specifically, we investigate how individualist-collectivist culture affects the relationship between ownership concentration and earnings quality. We predict that the social connections among corporate insiders are stronger in collectivist societies, thus reducing corporate monitoring efficiency and exacerbating agency problems. Consistent with our prediction we find the poor earnings quality that normally goes hand-in-hand with concentrated ownership, is improved when the firm’s national culture is individualist. We further find that the poor earnings quality induced by ownership concentration is more pronounced in East Asia, where cultures are rooted in Chinese cultures and collectivism. This study sheds light on the role that individualist-collectivist culture plays in shaping corporate insiders’ ethical behavior.

Keywords: Earnings quality, ownership concentration, cultures, individualism, collectivism

JEL Classification: G3, M1, M4


The contingent effect of analyst coverage: how does analyst coverage affect innovation and Tobin’s Q?

Sung Hwan Jung*, The University of Suwon

This study hypothesizes that the relationship between analyst coverage and innovation (Tobin’s Q) is U-shaped. My results support this hypothesis. Specifically, I find that as a firm’s analyst coverage increases, innovation (Tobin’s Q) declines at first, reaching a low point at moderate levels of analyst coverage, and increase thereafter. These findings suggest that firms can transform its investments in the relationship with the analyst community into firm performance only after they make substantial investments in the relationship.

Keywords: Analyst coverage, innovation, Tobin’s Q


Does Stronger Intellectual Property Rights Protection Matter in Developing Local R&D Outsourcing Strategy?

Wen-Bin Chuang*, National Chi-Nan University
To-Han Chang, Nanhua University
Hui-lin Lin, National Taiwan University

This study examines whether the intellectual property rights (IPR) protection in the host countries has a significant moderating effect on the relationship between local R&D outsourcing strategy and subsidiary productivity. Due to the subsidiary mandate in the host country being categorized as exploitation-orientation or exploration-orientation, we further examine whether there is a different moderating effect for different types of a subsidiary mandate. This analysis takes advantage of the data-set on Taiwan-based subsidiaries and the IPR indices by the World Economic Forum over the 2006–2009 period. The empirical results show that a stronger degree of IPR protection is, on average, found to play a significant moderating role in the influence of R&D outsourcing strategy based on local collaboration relationships. Interestingly, the moderating effects are found to differ between exploitation-orientation and exploration-orientation.

Keywords: R&D outsourcing, IPR protection, Subsidiary productivity

JEL: F23, O34, O32


The Optimal Tariff Structure and Foreign Penetration

Susumu Cato*, The University of Tokyo

This study investigates tariff policies as a means of improving economic welfare. The government sets the tariff so as to maximize domestic welfare against foreign penetration. We examine the relationship between the optimal tariff structure and the degree of penetration. We find that the optimal tariff rate is non-monotonically related with the degree of penetration (inverse U-shape). We also show that intermediate degrees of foreign penetration are harmful for economic welfare.

Keywords: Tariff policy, foreign penetration, strategic trade policy, international competition


The effects of globalization on regional inequality in a model of semi-endogenous growth and footloose capital

Katsufumi Fukuda*, Hiroshima University

We show that manufacturing firms tend to locate only in northern regions when transportation costs are not high, and in both northern and southern regions when transportation costs are high. We made this determination through the use of a semi-endogenous research and development growth model that reflects international trade, footloose capital, and local knowledge spillover. Regional income inequality—defined here as differences in per-capita expenditure relative to the price index—decreases in the former scenario following globalization, as the northern share of expenditure does not change. This lack of change stems from there being a constant and exogenous growth rate. Additionally, the northern price index does not change, even as the southern price index decreases.

Keywords: trade integration, footloose capital, R&D growth, scale effects, regional inequality, local spillovers, full agglomeration


An anatomy of China’s eco-efficiency gains: the role of FDI

Chia-Hui Lu, City University of Hong Kong
Yu Pang*, Hong Kong Polytechnic University

This paper quantifies the role of FDI in the remarkable fivefold gains in eco-efficiency in China’s manufacturing during the period 1995–2006. We refine the conventional index decomposition method and apply it to China’s emission. We find that (i) foreign-invested enterprises (FIEs) have shifted production toward cleaner industries; (ii) the better abatement technique of FIEs explains 23% of the eco-efficiency gains; and (iii) another 69% of the eco-efficiency gains come from by progress in domestic firms’ abatement technique, which is associated with forward environmental spillovers from FIEs. Findings (ii) and (iii) lend support to the so-called Pollution Halo Hypothesis.

Keywords: foreign direct investment, eco-efficiency, spillovers, China

AMS Subject Classifications: F18, F64, Q56


Audit fee pressure and audit risk: evidence from the financial crisis of 2008

Catherine Heyjung Sonu, Korea National Open University
Hyejin Ahn*, Seoul National University
Ahrum Choi, Hong Kong Baptist University

This paper investigates whether the downward pressure on audit fees during crisis affects the audit fee structure. The empirical results reveal the following: First, audit fees dropped significantly during the financial crisis period. Second, auditors respond differently to small clients and risky clients when facing downward pressure on audit fees. Finally, the above mentioned findings are more pronounced when the client is under high pressure to reduce expenses. Collectively, the above results provide useful insights into how auditors behave when they are under pressure to reduce audit fees.

Keywords: Audit fee, audit risk, financial crisis, fee pressure


Ex-post examination of mergers: effects on retail prices

Koki Arai*, Shumei University

Merger control can be assessed simply by observing price movements of the product in question. In this study, three ex-post merger evaluations show statistically significant increase in price. Thus, in each case, the change in market power is analyzed in terms of changes in market sales and market share. The analyses indicate that market sales values increased, but market share decreased significantly. Although several studies showed the market price situation before and after a merger, this study is the first to analyze the appropriateness of merger control in terms of market sales and market share. In addition, one of the merging parties was likely to reposition its production lines, indicating that mergers and acquisitions may be used as a tool for strategic product differentiation. That is, under such merger regulations, leading examples of a merging party developing a marketing strategy are indicated.

Keywords: competition policy, ex-post examination, merger


Product market competition on the effectiveness of internal control

Seon Mi Kim, Chonnam National University
Yura Kim*, University of Seoul

This paper investigates the impact of product market competition on a firm’s internal control system, which is an important corporate control mechanism. We measure the effectiveness of a firm’s internal control system based on the material weakness disclosure under Section 404 of the Sarbanes-Oxley Act (SOX). Using several measures to capture different dimensions of product market competition, we find that firms operating in competitive markets are more likely to have material weakness under Section 404 of the SOX; further, they are more inclined to disclose multiple internal control weaknesses. These results are robust after controlling for both internal and external governance mechanisms. The results indicate that market competition reduces the effectiveness of internal controls over financial reporting and hampers the quality of a firm’s information environment.

Keywords: Product market competition, internal control effectiveness, material weakness, corporate governance

JEL Codes: M41, M42


Bank connections and corporate risk-taking: evidence from China

Shengbao Zhai, Anhui University of Finance and Economics Lu Xie*, Renmin University of China
Sheng Zhang*, Zhongnan University of Economics and Law

This paper examines the impact of bank connections on corporate risk-taking. The results show that firms with bank connections exhibit a higher degree of corporate risk-taking than firms without bank connections, and that the difference is more prominent in provinces with a poor financial environment. Specific types of bank connections – executive and cross-shareholding connections – are further examined and we find that the effect only exists in firms with executive and bank-holding connections, not in firms connected to banks as shareholders. This demonstrates that having bank connections prompts firms to undertake more risk-taking projects and increases the magnitude of corporate risk-taking.

Keywords: Bank connections, corporate risk-taking, financing capability, related loans, financial environment

JEL classification codes: G21, G32, L14, O16, P48


How does human resource investment in internal control affect audit reporting lag?

Il-Hang Shin, Yonsei University
Ho-Young Lee*, Yonsei University
Hyun-Ah Lee, Gachon University
Myungsoo Son, California State University

The Korean government requires listed firms to disclose the total number of employees engaged in the implementation of internal controls (hereafter, IC personnel) and the number of IC personnel in accounting, finance, information technology and systems departments, and other related functional areas. Using data unique to Korea, this study examines the effect of human resource investment in internal control on audit reporting lag (ARL). We employ quantitative and qualitative measures for the IC personnel, and the ARL is measured by the time between the fiscal year-end and the audit report date. We find an insignificant association between the quantitative measure (the number of IC personnel) and ARL. On the other hand, we find that the qualitative measure (the average experience of the IC personnel) reduces the audit time, thereby decreasing the ARL. This result highlights the importance of qualitative aspect in investments in IC personnel, which could be useful for firms that desire to reap the best result from the investment. Further analysis shows that investments in IC personnel at other departments as well as accounting and finance department increase audit efficiency. We confirm the robustness of our results through a series of additional analyses.

Keywords: Internal control, human resources, audit reporting lags, timeliness of financial reporting

JEL classification: G18, G31, G38, M40, M41


Pension accruals and share prices: evidence from the amortization costs of transition amounts

Takafumi Sasaki*, Tokyo University of Science

This article investigates whether the market rationally evaluates the economic value of pension plans by focusing on the impacts of amortization costs of transition amounts on share prices. Because the amortization costs of transition amounts are cost attributed to the old deficits that appeared in the adoption year, they do not contain new additional information unless managers deliver private information through accountings choices. The data-set is from Japanese firms after the adoption of the postretirement accounting standard wherein recognition costs of transition amounts had a huge impact on the bottom-line earnings of sponsoring firms. We find that investors evaluate the amortization costs of transition amounts as though they hold new, value-relevant information. On the other hand, we do not have clear evidence that managers deliver private information through accounting discretions on the amortization of transition amounts.

Keywords: Pensions, pension accounting, earnings management

JEL Classification Codes: M41, G14


Credibility of voluntary disclosure in financial firms

Shirley J. Ho, National Chengchi University

Financial firms are more vulnerable to the investors’ lacking in confidence, and a speculative run could happen when all investors lose their confidence and withdraw simultaneously. In addition to the existing discussions on endogenous misreporting cost such as reputation, propriety and social norm effects, this paper demonstrated that the threat of speculative run can serve as an endogenous misreporting cost which prevents the bank manager from lying in their voluntary disclosures. Hence, voluntary disclosures such as management earnings forecast can be informative, and the degree of information revelation will be positively related to depositors’ perspectives on the random investment shock.

Keywords: Voluntary disclosure, financial firms, speculative run


Volume 24, Issue No. 3 & 4, September and December 2017

  • Minjung Kang, Ho-Young Lee*, Myungsoo Son, and Michael Stein, The Association between Human Resource Investment by Audit Firms and Their Audit Quality
  • Yi-Ping Liao*, Sheng-Min Hung and Kuei-Fu Li, Does the conflict of interest matter for credit ratings? The impact of the client’s economic importance and the CRA tenure
  • Shuangyan Li, Genfu Feng, and Guangjun Cao, The role of regional institutional environment in the relationship between political participation and effective tax rates: Evidence from Chinese listed private firms before the financial crisis
  • Lee, Yen-Jung*, Market Reactions to Unexpected Relative Earnings Performance
  • Inamura, Yumi and Okuda, Shin'ya*, Deferred Taxes and Cost of Debt: Evidence from Japan
  • Dongchu Cho* and Kyuesook Han, Decomposing Exchange Rates of Asia into Financial and Real Factors
  • Hong Zhao*, Maoyong Cheng and Jerry W. Lin, The effects of bank privatization on performance and prudential behavior in China: does state ownership matter?
  • Young-soon Cheon, Dan Dhaliwal, Moonchul Kim, and Mun Ho Hwang*, Do regulator inspections of audit firms discern audit quality? Evidence from Korean Regulator Inspections
  • Robert James Parker*, Mai Dao, Hua-Wei Huang, and Yun-Chia Yan, Disclosing material weakness in internal controls: Does the gender of audit committee members matter?
  • Hyungtae Kim, Byungjin Kwak*, Youngdeok Lim and Jaeyoon Yu, Audit committee accounting expertise, CEO power, and audit pricing
  • Baolei Qi and Gaoliang Tian and Rong Yang*, Do Social Ties between Individual Auditors and Client CEOs/CFOs Matter to Audit Quality?
  • Noriaki Matsushima*, Expanding distribution channels
  • Leonard F.S. Wang* and Wei Yu, Network Externalities and Tariff Structure


The Association between Human Resource Investment by Audit Firms and Their Audit Quality

Minjung Kang, Incheon National University
Ho-Young Lee*, Yonsei University
Myungsoo Son, California State University
Michael Stein, Old Dominion University

Utilizing unique data available only in Korea, we examine the association between investment in human resources and audit quality provided by audit firms. While human resources investment is important in improving audit quality, few studies have examined this association mainly because public data about human resources investment and financial statements of audit firms are unavailable. Using two proxies for audit quality (i.e. discretionary accruals and accounting conservatism), we provide evidence that higher compensation in audit firms improves audit quality. In addition, we find higher audit quality in audit firms with higher education expenses, when audit quality is measured by the level of conservatism of clients’ financial statements. These results support regulators’ stance that quality control through human resources investment in audit firms can effectively improve audit quality and therefore the quality of clients’ financial reporting. However, we find no association between education expenses and the average absolute value of discretionary accruals of audit clients. These results generally suggest that direct investment in human capital (i.e. compensation) is more effective in improving audit quality than indirect investment in human capital (i.e. education expenses).

Keywords: Audit quality, human resources investment, discretionary accruals, conservatism


Does the conflict of interest matter for credit ratings? The impact of the client’s economic importance and the CRA tenure

Yi-Ping Liao*, Ming-chuan University, Taiwan
Sheng-Min Hung, Soochow University, Taiwan
Kuei-Fu Li, Ming-chuan University, Taiwan

We investigate whether the potential conflict of interest affects credit ratings. Based on US data, we find that: (1) the client’s economic importance is positively related to credit ratings, and impairs the rating accuracy, and (2) at first, the credit rating (rating accuracy) increases (decreases) in the early years of the CRA-client relationship, but when the length of the engagement relationship gets longer enough, the CRA tenure is negatively (positively) related to the credit rating (rating accuracy). Overall, it suggests that the CRAs’ contention that the conflict of interest has been well-managed does not appear to be convincing.

Keywords: Credit ratings, conflict of interest, economic dependence, tenure


The role of regional institutional environment in the relationship between political participation and effective tax rates: Evidence from Chinese listed private firms before the financial crisis

Shuangyan Li*, Xi'an Jiaotong University
Genfu Feng, Xi’an Jiaotong University
Guangjun Cao, Georgian College, Canada

Using a sample of Chinese listed private firms selected from the period of 1999–2007 before the financial crisis, we investigate that the role of regional institutional environment (RIE) in the relationship between political participation (POLP) and effective tax rates (ETR). We find that the correlation between POLP and ETR depends on RIE, which can be characterized in two ways: marketization and corruption levels; and in particular, a statistically significant positive relation is shown to exist between POLP and ETR among firms located in regions with low corruption levels, and so does a statistically significant negative correlation among firms located in regions with high corruption levels. Correlations of opposite nature exist if the marketization level is concerned, but the relations are not as strong as in the case of corruption level.

Keywords: Effective tax rates, political participation, marketization, corruption


Market Reactions to Unexpected Relative Earnings Performance

Yen-Jung Lee*, National Taiwan University

This paper documents that investors value unexpected changes in a firm’s relative earnings performance (REP) in addition to its absolute earnings surprise on the firm’s earnings announcement date. Consistent with REP filtering out industry-wide common shocks and conveying information about the firm’s competitive advantage over its industry peers, investors react more strongly to unexpected relative earnings for firms with a stronger peer-firm earnings correlation and for firms with fewer growth options in their operations relative to their industry peers. Moreover, current unexpected REP is positively associated future growths in sales, market share, and earnings performance, suggesting that firms with stronger REP are better able to capture future industry opportunities.

Keywords: Relative earnings performance, earnings surprise, intra-industry information transfer


Deferred Taxes and Cost of Debt: Evidence from Japan

Yumi Inamura, Niigata University, Japan
Shin'ya Okuda*, Nagoya city university, Japan

This paper investigates the information content of deferred taxes in the Japanese debt market by analyzing the relationship between deferred taxes and cost of debt. We find that while deferred tax liabilities are positively associated with cost of debt, deferred tax assets are not. This evidence may reflect the greater probability of tax obligations being realized compared to tax benefits. Further, we analyze the relationship between cost of debt and the various components of deferred taxes. We find that net deferred taxes caused by temporary differences are negatively related to cost of debt. On the other hand, net deferred taxes from net operating losses are positively related to cost of debt. Additionally, we find that valuation allowances are less positively related to cost of debt when firms are suspected of seeking to avoid losses or decreases in earnings. These results suggest that debt investors in the Japanese debt market evaluate the various components of deferred taxes differently.

Keywords: Deferred tax, cost of debt, deferred tax asset, deferred tax liability, valuation allowance


Decomposing Exchange Rates of Asia into Financial and Real Factors

Dongchu Cho*, KDI School of Public Policy and Management
Kyuesook Han, University of Seoul

This paper imagines a foreign exchange market in which a net financial flow curve and a current account curve interact to simultaneously determine equilibrium levels of exchange rate and current account. To identify the two curves, we selected four Asian countries (Indonesia, Korea, Philippines, and Thailand) that drastically liberalized financial accounts and exchange rate systems after the 1997 crisis, and assumed that the institutional changes altered the slopes of net financial outflow curves while maintaining those of current account. The results indicate that currency depreciation greatly contributes to stabilizing foreign exchange markets by suppressing financial outflows (or attracting inflows), although the effects are not uniform across the countries in the short-run.

Keywords: Exchange rate, financial flow, current account, SVAR

JEL Classification: F31, F32


The effects of bank privatization on performance and prudential behavior in China: does state ownership matter?

Hong Zhao*, Xi’an Jiao Tong University
Maoyong Cheng, Xi’an Jiao Tong University
Jerry W. Lin, Colorado State University at Pueblo

Using China’s data from 2000 to 2013, we examine the effects of bank privatization on performance and prudential behavior, and find the following results. First, bank operating efficiency, credit risk, and prudential behavior have improved after introducing foreign strategic investors (FSIs). However, these effects are diminished as time passes. Second, going public increases bank profitability, operating efficiency, and prudential behavior, and reduces credit risk, which are also reversed as time passes. Finally, the effects of introducing FSIs on credit risk and prudential behavior are weaker for state-owned banks than for other banks, while the opposite is true for going public.

Keywords: Introducing foreign strategic investors, going public, performance, prudential behavior, state ownership


Do regulator inspections of audit firms discern audit quality? Evidence from Korean Regulator Inspections

Young-soon Cheon, Chung-Ang University
Dan Dhaliwal, University of Arizona
Moonchul Kim, Kyung Hee University
Mun Ho Hwang*, Kyung Hee University

During the past decade, many countries have adopted a regulatory inspection program to oversee the auditing profession. In general, the inspection programs consist of two components: evaluation of accounting firms’ quality control systems and review of selected audit engagements. This study examines whether quality control system deficiencies and audit engagement deficiencies identified in the inspections reflect the audit quality of accounting firms using the data from Korean regulator inspections. We find that both quality control system deficiencies and audit engagement deficiencies reflect the audit quality of the accounting firms under inspection. Our findings also suggest that quality control system deficiencies discern the audit quality of accounting firms better than audit engagement deficiencies. Our results are robust across audit quality measures and auditor size. This study expands the literature by providing evidence about quality control system deficiencies and providing evidence for more comprehensive measures of audit quality.

Keywords: Regulatory inspections, audit quality, quality control system, audit engagement, deficiencies


Disclosing material weakness in internal controls: Does the gender of audit committee members matter?

Robert James Parker*, University of New Orleans
Mai Dao, University of Toledo
Hua-Wei Huang, National Cheng Kung University
Yun-Chia Yan, University of Texas

As mandated by Sarbanes-Oxley Act, firms must disclose material weaknesses in internal controls. This study extends the body of accounting research that seeks to identify the factors associated with such disclosure. Drawing upon gender research in the behavioral sciences, we argue that female audit committee members examine internal controls more critically and thoroughly than their male counterparts; hence, firms with females in these positions are more likely to report problems. A logistic regression model of material weakness disclosure is developed that includes, as a predictor variable, proportion of females on the audit committee. Results support the proposed relationship.

Keywords: Sarbanes-Oxley Act, material weakness in internal controls, gender, audit committee


Audit committee accounting expertise, CEO power, and audit pricing

Hyungtae Kim, Arkansas State University
Byungjin Kwak*, Korea Advanced Institute of Science and Technology (KAIST)
Youngdeok Lim, The University of New South Wales
Jaeyoon Yu, Korea Advanced Institute of Science and Technology (KAIST)

The Sarbanes–Oxley Act of 2002 (SOX) mandates that all listed firms disclose whether they have a financial expert on the audit committee, highlighting the committee’s expertise. However, some argue that non-accounting financial experts, compared to accounting financial experts, are not sufficient to ensure audit committee effectiveness because the former lack accounting knowledge. Accounting experts on audit committees may require higher audit efforts, while auditors may assess audit committees with accounting financial experts as effective, decreasing audit efforts. This paper first inspects the effect of audit committee accounting expertise on audit fees as a proxy for audit efforts, and then investigates whether the effect is moderated by powerful CEOs. Using post-SOX period data, our results show that, on average, firms with accounting experts on audit committees are more likely to pay higher audit fees, and the effect is less pronounced when a powerful CEO manages a firm.

Keywords: Accounting experts, audit committee, audit fees, CEO power

JEL Classification: G30, G34, G38, M12, M40, M41, M42, H83


Do Social Ties between Individual Auditors and Client CEOs/CFOs Matter to Audit Quality?

Qi Baolei and Tian Gaoliang, Xi'an Jiaotong University
Yang Rong*, Rochester Institute of Technology

The objective of this paper is to investigate whether and how the social ties between individual auditors and client chief executive officers (CEOs)/chief financial officers (CFOs) affect audit quality using a large sample of publicly traded firms in China. We define social ties between individual auditors and client CEOs/CFOs as ‘working or educational alumni.’ We find that clients with social ties are significantly and positively associated with abnormal accruals and the presence of reporting small profits, and are more likely to receive clean audit opinions compared to clients without social ties. Moreover, we find that the working-tie effect on audit quality is stronger than the school-tie effect. Furthermore, we find that socially connected clients are more likely to downward restate their audited earnings in subsequent years. In addition, we find that the social-tie effect on audit quality can be mitigated by several personal characteristics of individual auditors, such as partner, female, accounting major, auditing experience, etc. Overall, our study sheds new light on the impact of social ties between individual auditors and client executives on audit quality.

Keywords: Client executives, individual auditors, social ties, audit quality


Expanding distribution channels

Noriaki Matsushima*, Osaka University

I provide a model in which upstream producers, whose production cost is quadratic in quantity, sell their products through two distribution channels, a traditional channel and an external retailer. Some producers (called ‘large’ producers) supply to both channels, whereas other producers (called ‘small’ producers) are only able to supply to the traditional channel. All producers compete in quantity in the traditional channel. The external retailer offers a nondiscriminatory per unit payment to upstream producers. I show that distribution channel expansion executed by a small producer can decrease the producer’s profit and the sum of the upstream producers’ profits.

Keywords: Channel expansion, dual channel, increasing marginal cost, retailers


Network Externalities and Tariff Structure

Leonard F.S. Wang*, National University of Kaohsiung
Wei Yu, Xi’an Jiaotong University

In this paper, we show that with cost asymmetry, stronger network externalities and less differentiated goods, the uniform tariff rate set by the government of the importing country increases and the optimal discriminatory-tariff gap widens. In addition, under network externalities and good differentiation, we demonstrate that: (a) the optimal tariff policy is superior to free trade in maximizing the domestic social welfare; (b) the maximum-revenue tariff rate is always higher than the optimal tariff rate; (c) the consumer surplus and social welfare are always higher under the optimal tariff policy than under the maximum-revenue tariff policy.

Keywords: Network externalities, international differentiated duopoly, optimum-welfare tariff, maximum-revenue tariff