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Does auditor-client distance matter to real earnings management? Evidence from China

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  • Xue Li
  • Zhiru Lin
  • Jin-hui Luo

Abstract

Using a large sample of Chinese listed firms and accounting firms during 2004–2013, this study investigates whether and how auditor-client distance affects corporate real earnings management (REM). We find that REM is positively associated with auditor-client distance, and the positive association is more pronounced in client firms with lower information transparency and higher business complexity, suggesting that information advantage arising from geographical proximity may facilitate auditors’ supervision over their client firms’ REM. Moreover, both marketization environment and ownership concentration significantly attenuate the positive association, thereby reflecting a substitution effect between external audit and the other two governance mechanisms.

Suggested Citation

  • Xue Li & Zhiru Lin & Jin-hui Luo, 2020. "Does auditor-client distance matter to real earnings management? Evidence from China," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 27(5), pages 531-557, September.
    • Handle: RePEc:taf:raaexx:v:27:y:2020:i:5:p:531-557
    DOI: 10.1080/16081625.2019.1567353
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    Cited by:

    1. Mubashar Tanveer & Mohsin Altaf & Zahid Ali Akbar & Uzma Nisar, 2022. "Influence of Advertising Intensity on Real Earnings Management: Evidence from Four Sectors of Pakistan," Journal of Economic Impact, Science Impact Publishers, vol. 4(1), pages 158-164.
    2. Qian Sai & Yanxi Li & Yanwen Liu & Heng Zhao & Shanshan Ouyang, 2024. "Audit report information improvement and earnings management," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 425-442, January.
    3. Khwaja Naveed & Fahad Khalid & Cosmina L. Voinea & Nadine Roijakkers & Cosmin Fratostiteanu, 2023. "Board gender diversity and corporate environmental commitment: A subnational perspective," Business Strategy and the Environment, Wiley Blackwell, vol. 32(7), pages 4970-4990, November.
    4. Feng Huang & Jie Gao, 2022. "Customer and Tax Avoidance: How Does Customer Geographic Proximity Affect a Supplier’s Tax Avoidance?," Sustainability, MDPI, vol. 14(22), pages 1-30, November.

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