Political Connections, Auditor Choice and Corporate Accounting Transparency: Evidence from Private Sector Firms in China

This article investigates the way in which political connections impact auditor choice. Using a political connection index constructed based on the bureaucratic ranks of executive managers and board members in Chinese private sector firms, we find that for firms with weak political connections, the likelihood of hiring high†quality auditors increases with the degree of political connectedness, while it decreases with political connectedness for firms with strong political connections. This inverse U†shaped relationship is particularly pronounced for firms with ownership structures that intensify agency problems. Finally, we find that political connections and accounting transparency also have an inverse U†shaped relationship.