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Journal of Business Ethics

, Volume 158, Issue 3, pp 779–806 | Cite as

Do Bond Investors Care About Engagement Auditors’ Negative Experiences? Evidence from China

  • Guangming Gong
  • Liang Xiao
  • Si XuEmail author
  • Xun Gong
Original Paper
  • 335 Downloads

Abstract

Using data from China, where the identity of engagement auditors is disclosed, we find significant relationships between engagement auditors’ negative experiences and the costs of corporate bonds. Further tests differentiate field and review auditors’ experiences, and we find that both field and review auditors’ negative experiences are significantly related to higher costs of corporate bonds. In addition, we find that the above results are significant only when the engagement auditors are affiliated with non-Big10 audit firms. Using path analysis, we find that credit rating is a possible channel through which information on engagement auditors’ negative experiences can transfer to bond investors. Regarding non-price terms, we conclude that engagement auditors with negative experiences are associated with smaller bond sizes, shorter bond maturities, a higher likelihood of requiring collateral, and more restrictive covenants. Further analyses also show that the effects of engagement auditors’ negative experiences on the costs of corporate bonds are less pronounced for well-governed firms. To show that our results obtained from China’s corporate bond market are relevant to loan markets, we replicate the above tests using a Chinese sample, and the results from the loan market are consistent with those from the corporate bond market. Overall, our empirical results suggest that investors are indeed concerned with engagement auditors’ negative experiences.

Keywords

Engagement auditors Experiences Costs of corporate bonds 

Notes

Acknowledgement

We would like to thank Steven Dellaportas (the Editor), two anonymous expert reviewers, Jin-Chuan Duan, Lin Chen, Xiaohui Li, Lin Liao, Wanfa Lin for helpful comments and suggestions. We also appreciate comments and suggestions from participants of the Seminar on Finance, Insurance, and Statistics at Hunan University; the 2016 Conference of Accounting Society of China; the Second Seminar on Finance and Accounting at Xiangtan University; and the International Workshop on Interdisciplinary Research in Accounting at Southwestern University of Finance and Economics (Grant No. 20130161110045).

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Authors and Affiliations

  1. 1.Business School of Hunan UniversityChangshaChina
  2. 2.School of Economics and ManagementSouth China Normal UniversityGuangzhouChina
  3. 3.College of Finance and StatisticsHunan UniversityChangshaChina

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