The Geography Of Auditors And Client Firms' Stock Price Crash Risk

For a long time,external audit is considered as an important part of modern corporate governance mechanism,playing an important role in reducing information asymmetry and alleviating agency problems.In the practice of auditing,some listed companies tend to hire local accounting firms to provide auditing services,while others prefer to hire foreign auditors to provide auditing services.This phenomenon shows that the auditor's geographical location is likely to be an important potential factor that affects the interaction between listed companies and auditors.Given the unstable capital market in China,the frequent occurrence of stock price crash and the constant improvement of relevant laws and regulations in China's external audit,whether the geographical location of auditors has an impact on the stock price crash risk,and how does it affect the stock price crash risk?This is the main research issue of this paper.In this paper,by manually collecting the registered addresses of listed companies and the accounting firm's office address in the annual reports of A-share listed companies from 2010 to 2016,taking 9868 annual observation data as our research sample,we examined the relationship between the geographical proximity of auditors and the stock price crash risk from the perspective of information asymmetry and auditor independence.The empirical evidences show that the closer the geographical distance between the auditor and the client company,the lower the risk of the client company's stock price collapse.The influence of auditor's geographical proximity on the crash risk is different due to external information environment and auditor's independence.Specifically,based on the information asymmetry perspective,the positive impact of auditor's geographic proximity on the crash risk is more pronounced among client companies with lower analyst coverage.Based on the auditors' independence perspective,when the CEO power is weaker,the positive relationship between geographical distance and the crash risk will be strengthened.Further research finds that,the positive effect of the auditor's geographical proximity on the stock price crash risk mainly occurs in client companies with higher operating complexity.The research significance of this study lies in the following points.Firstly,this study uses the new feature of geographical proximity between auditor and client companies to test the difference of supervisory role of local and foreign auditors.Compared to previous literatures mainly focusing on the individual characteristics of auditors(such as industry expertise,social networks,personal experience,etc.),this paper could further enrich the auditor's study of the econometric consequences.Secondly,this study can deepen the research on the determinants of the stock price crash risk.The existing literature mainly studies internal factors such as corporate social responsibility,corporate information transparency,management power and other external factors such as analysts,institutional investors and auditor industry specialization on crash risk.There is little literature on the crash risk from the perspective of the geographical proximity.Thirdly,this article studies the economic consequences of the geographical proximity of auditors from the perspective of the crash risk and expands the crossover study between geo-economics and finance.Finally,the findings of this paper also suggest that regulators implement the legal system constraints on auditors and enhance the independence of auditors and guide the financial analysts to strengthen the tracking of listed companies hiring foreign auditors.