Investor Protection, Political Connection, and Audit Quality: Investigation of Non-State-Owned Firms in China

The economic reform over the last 30 years has produced a viable non-state-owned (private) sector in China, which is now responsible for 65% of the country's GDP and 80% of its annual growth. The non-state-owned sector is the engine of economic growth and the largest provider of employment in China. Despite its importance of both economically and in terms of shaping the future reform directions of the country, there is little academic attention paid to non-state-owned firms and no published research done on them. Specifically, it is not well understood how non-state-owned firms operate, grow, and prosper in a transitional institutional context (i.e. China) dominated by the extreme importance of relations (personal, social, and political) and a natural mix of business and politics. Part of what is hoped to be a collective effort to understand the non-state-owned sector in China, this project seeks to empirically investigate the possible impact of political connection on a non-state-owned firm’s decision to obtain quality auditing. The investigation is carried out within the perspective that quality auditing is demanded to protect small investors. This project is in part motivated by a recent stream of innovative research which seeks to explain the importance of institutions (political, economic, and legal) on a firm's incentives and consequent decisions, including accounting decisions, e.g. the decision to obtain quality auditing.