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Judicial system reform, agency costs, and audit pricing

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  • Zhang, Tianyi
  • Pan, Yuanli

Abstract

We investigate the impact of China's bankruptcy courts on audit pricing using A-share listed firms from 2013 to 2023. Employing a multi-period DID approach, we find that bankruptcy courts significantly reduce audit fees by mitigating debt agency costs through improved creditor oversight. The effect is more pronounced for highly leveraged firms, private enterprises, and Big Four clients. Our findings advance the "judicial reform–corporate governance–audit behavior" framework and offer policy insights for optimizing bankruptcy institutions.

Suggested Citation

  • Zhang, Tianyi & Pan, Yuanli, 2025. "Judicial system reform, agency costs, and audit pricing," Finance Research Letters, Elsevier, vol. 85(PC).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pc:s1544612325013844
    DOI: 10.1016/j.frl.2025.108129
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    References listed on IDEAS

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    1. Zhang, Xuehua & Yan, Huanmin & Hu, Fang & Wang, Hongjian & Li, Xiaoning, 2022. "Effect of auditor rotation violation on audit opinions and audit fees: Evidence from China," Research in International Business and Finance, Elsevier, vol. 62(C).
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    3. Simunic, Da, 1980. "The Pricing Of Audit Services - Theory And Evidence," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 18(1), pages 161-190.
    4. James C. Hansen & Susan M. Murray & Sang Hyun Park & Nari Shin, 2022. "Judicial hellholes and other differential characteristics: is state-level legal risk reflected in audit fee pricing?," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 37(5), pages 594-624, April.
    5. Bo Li & Jacopo Ponticelli, 2022. "Going Bankrupt in China [The politics of foreclosures]," Review of Finance, European Finance Association, vol. 26(3), pages 449-486.
    6. Müller, Karsten, 2022. "Busy bankruptcy courts and the cost of credit," Journal of Financial Economics, Elsevier, vol. 143(2), pages 824-845.
    7. Zhang, Yue & Wu, Kai, 2023. "Bankruptcy court establishment and corporate risk-taking," Finance Research Letters, Elsevier, vol. 58(PC).
    8. Lai, Jieji & Hu, Shiyang, 2024. "Bankruptcy judicial system reform and corporate financial litigation risk: A quasi-natural experiment in China," Finance Research Letters, Elsevier, vol. 62(PB).
    9. Rehman, Obaid Ur & Zhou, Zihan & Wu, Kai & Li, Wen, 2024. "From courtrooms to corporations: The effect of bankruptcy court establishment on firm acquisitions," Finance Research Letters, Elsevier, vol. 61(C).
    10. Zhong, Tingyong & Duan, Ying & Ding, Zhiguo, 2024. "How bankruptcy system innovation affects firm investment behavior: A quasi-natural experiment based on the establishment of bankruptcy courts in China," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    11. repec:eme:maj000:maj-11-2020-2917 is not listed on IDEAS
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