Title: Audit Firm Size Effects in China's Emerging Audit Markets
Reference Number: 1114
Publication Date: December 2004
JEL Classifcation: G3, M4

Chuntao Li
The University of Hong Kong

Frank M. Song
The University of Hong Kong

Sonia M.L. Wong
Hong Kong Institute of Economics and Business Strategy


Using a panel data of both audit firms and listed firms in China from 2001 to 2003, we examine the continuous relation between audit firm size and audit quality in China's relatively competitive market for publicly listed firms. We find that larger auditors are more likely to issue modified opinions than smaller auditors. We also find that larger auditors tend to enjoy a significant audit fee premium. These results indicate the existence of not only a positive but also a continuous relation between audit firm size and audit quality in the market. We further examine the relation between the size of auditors and the listed firms' corporate governance and offer evidence that the size of auditors is related positively to quality of corporate governance. The results suggest that auditing is a complement to various internal corporate control mechanisms in the listed firms.


Revised May 2005

Key words: Audit firm Size, Audit Quality, Emerging Market, China's Audit Market, Corporate Governance

Last modified: 05/11/2005