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Hometown favoritism and the quality of government monitoring: Evidence from rotation of Chinese auditor

Author

Listed:
  • Jian Chu

    (Nanjing University)

  • Raymond Fisman

    (Boston University)

  • Songtao Tan

    (Renmin University of China)

  • Yongxiang Wang

    (University of Southern California, Shanghai Advanced Institute of Finance, Shanghai Jiaotong University, Shanghai)

Abstract

Audits are a standard mechanism for reducing corruption in government investments. The quality of audits themselves, however, may be affected by relationships between auditor and target. We study whether provincial chief auditors in China show greater leniency in evaluating prefecture governments in their hometowns. In city-fixed-effect specifications – in which the role of shared background is identified from auditor turnover – we show that hometown auditors find 38 percent less in questionable monies. This hometown effect is similar throughout the auditor’s tenure, and is diminished for audits ordered by the provincial Organizations Department as a result of the departure of top city officials. We argue that our findings are most readily explained by favoritism rather than an endogenous response by local officials to concerns of better enforcement by hometown auditors. We complement these city-level findings with firm-level analyses of earnings manipulation by state-owned enterprises via real activity manipulation (a standard measure from the accounting literature), which we show is higher under hometown auditors.

Suggested Citation

  • Jian Chu & Raymond Fisman & Songtao Tan & Yongxiang Wang, 2020. "Hometown favoritism and the quality of government monitoring: Evidence from rotation of Chinese auditor," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-343, Boston University - Department of Economics.
  • Handle: RePEc:bos:iedwpr:dp-343
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    References listed on IDEAS

    as
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    Cited by:

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    2. Chen, Shuo & Qiao, Xue & Zhu, Zhitao, 2021. "Chasing or cheating? Theory and evidence on China's GDP manipulation," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 657-671.
    3. Patrick Francois & Francesco Trebbi & Kairong Xiao, 2016. "Factions in Nondemocracies: Theory and Evidence from the Chinese Communist Party," NBER Working Papers 22775, National Bureau of Economic Research, Inc.
    4. Li, Nian & Xu, Nianhang & Dong, Rui & Chan, Kam C. & Lin, Xiaowei, 2021. "Does an anti-corruption campaign increase analyst earnings forecast optimism?," Journal of Corporate Finance, Elsevier, vol. 68(C).
    5. Jia, Junxue & Liang, Xuan & Ma, Guangrong, 2021. "Political hierarchy and regional economic development: Evidence from a spatial discontinuity in China," Journal of Public Economics, Elsevier, vol. 194(C).

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    More about this item

    Keywords

    Social Ties; Audit quality; State-owned enterprise; Government investment; China;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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