Does Short Selling Improves Audit Quality?

External auditing is a guarantee of the quality of financial reports of listed companies and can reduce the information asymmetry between market participants.However,intermediaries will also have time to neglect their duties.Does the short selling,as an important part of external governance,play an effective supervisory role and help improve the quality of independent auditing? Based on the natural experiment of the securities lending business launched by China’s A-share market in 2010,this paper confirms the positive impact of short-selling on audit quality based on the data of listed companies from 2007 to 2017.First,under the conditions of controlling the company effect,the year effect and other factors,the listed company’s audit quality is significantly improved after being included in the list of short selling,showing higher audit fees and audit delays,and less earnings management and finance.Secondly,in order to explore the dynamic effects of policies,we use a multi-period DID model to test and find that there is no time lag in the improvement of audit quality by short selling,and it can continue to play a role.Next,using the mediation effect test model to explore the impact path of the effect,and find that short selling has increased the attention of investors in the target company and the media environment of the auditor’s external environment.Auditor risk tolerance reduce and work harder to provide high quality audit services.Further research found that in non-state-owned enterprises and the companies with high institutional shareholdings,the short-selling mechanism promotes the audit quality more clearly.Based on the above conclusions,this paper suggests that China further open the securities lending business,increase the audit-related violation costs,actively guide institutional investors to participate and relax some media controls to give full play to the external governance role of short selling.