Can mandatory dual audit reduce the cost of equity? Evidence from China

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

View graph of relations

Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Number of pages30
Journal / PublicationAccounting and Business Research
Online published14 Apr 2021
Publication statusOnline published - 14 Apr 2021

Abstract

In China, a mandatory dual audit system for domestic A-share firms cross-listed on the Hong Kong stock market (i.e. AH companies) was abolished in 2010. Since then, AH companies have been allowed to choose to have a dual audit or a single audit. We find that the mandatory dual audit regime before the deregulation is associated with a lower cost of equity than voluntary dual audit after the deregulation. Furthermore, the lower cost of equity under the mandatory dual audit regime is greater in companies exposed to stronger financial constraints and with higher agency costs, and is not attenuated by alternative voluntary audits. Our results are not affected by accounting standards convergence and audit quality, and are robust to various model specifications. Our results suggest that the role of mandatory dual audit in mitigating agency costs and information asymmetry is not replaceable by voluntary dual audit.

Research Area(s)

  • mandatory dual audit, deregulation, compliance, cost of equity, China