An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jing Huang
Greenwich University

Jason Zezhong Xiao
Cardiff University

Abstract: Using a multinomial logit model (the MNL) and a sample of 933 firm-year observations in 2002 and 2003, this paper tests the political cost hypothesis, substitute hypothesis, agency cost hypothesis, and signalling hypothesis for auditor selection in the Chinese stock market. The results suggest that internal motivations such as reducing agency costs and signaling better performance are weak for Chinese publicly listed companies to select Big 4 auditors and large local auditors. However, super large state-owned companies, companies with a large proportion of non-tradable shares, and companies issuing shares to foreign investors prefer Big 4 auditors to mitigate political costs or to substitute for weak legal protection of investors.

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