Corporate Governance, Auditor Choice and Auditor Switch - Evidence from China

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The purpose of this study is to investigate the association between firms’ internal corporate governance mechanism and their auditor choice and auditor switch decisions and how investors respond to firms’ auditor choice and auditor switch decisions in the Chinese context. The findings of this study have theoretical and practical implications. Different from prior studies, we find that, in order to sustain opaqueness gains, firms with weak internal corporate governance mechanism and therefore high agency costs may be inclined to avoid high-quality auditors. This study further suggests that investors respond differently to different types of auditor switch (i.e., switching to a larger auditor and switching to a smaller auditor). There are also practical implications. To bolster the confidence of the market participants, the regulators should carefully monitor auditing practices to protect the interests of investors.