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Financial investment by non-financial firms: does it affect audit quality?

Author

Listed:
  • Litan Wang

    (Shanghai Lixin University of Accounting and Finance)

  • Kefei You

    (University of Greenwich)

  • Hui Chen

    (Shanghai Lixin University of Accounting and Finance)

Abstract

In the context of the global trend of increasing financial investment by non-financial firms, this study investigates how this process affects the audit quality of these firms. Employing data of Chinese listed non-financial firms from 2011 to 2020, we first examine whether the increasing proportion of financial assets in the total assets has an adverse impact on the audit quality of these firms. We then analyze the mediation effect of operational volatility on such impact by adopting the mediation test of the modified Sobel’s z and the bootstrap test. We find that a higher proportion of financial assets to total assets lowers the audit quality, confirming that the financialization of non-financial firms deteriorates their audit quality. Furthermore, the mediation tests show that operational volatility is an important channel for this negative effect.

Suggested Citation

  • Litan Wang & Kefei You & Hui Chen, 2025. "Financial investment by non-financial firms: does it affect audit quality?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 29(3), pages 699-733, September.
    • Handle: RePEc:kap:jmgtgv:v:29:y:2025:i:3:d:10.1007_s10997-024-09714-y
    DOI: 10.1007/s10997-024-09714-y
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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