Do Chinese Firms Respond to U.S. Regulation with Compliance Shopping?

ABSTRACT

This study considers cross-border auditor switching by Chinese firms and its implications for reporting quality. We provide descriptive details from 2007 to 2022, a period spanning the initial negotiations between U.S. and Chinese authorities through an ensuing tightening of U.S. regulations affecting Chinese firms whose local auditors are inaccessible to the Public Company Accounting Oversight Board (PCAOB). Generally, we observe switching in both directions over the full testing period, with switches from non-local to local auditors broadly marking improvements in reporting quality. However, for the subperiod of 2018 through 2022, in which the Holding Foreign Companies Accountable Act was introduced by U.S. legislation, we note a shift in Chinese firms’ switching behavior toward the engagement of non-local, PCAOB-accessible auditors, when firms’ failure to do so positioned them at risk of being delisted from U.S. exchanges. This shift coincides with some evidence pointing to a decline in reporting quality.

Data Availability: Data are available from the public sources cited in the text.

JEL Classifications: M42; M48.