Audit quality and financial distress: Evidence from China

Abstract

This study empirically examines the relationship between audit quality and financial distress based on Chinese listed firms. This paper examines whether high audit quality can reduce the likelihood of financial distress, especially in high growth firms and government owned firms. Results indicate that the quality of the external audit has a negative relationship with financial distress. In addition, for high growth firms, results show that the relationship between audit quality and financial distress is more significant. Finally, the association between audit quality and financial problems is moderated by ownership. The overall results demonstrate that audit quality is negatively associated with financial distress and their relationship is enhanced in growth firms and state-owned firms. The findings suggest that in China, external auditing is an effective governance mechanism to face a financial crisis.