Geographic location of audit committee chairs and accruals quality: evidence from China

Abstract

Using a large sample of Chinese firms, we examine if the geographic proximity of audit committee chairs (ACCs) to firms is associated with accruals-based financial reporting quality. We define an ACC who is in the same province/municipality as the firm headquarters as “local” and an ACC who is not as “nonlocal”. We find that a local ACC is associated with higher accruals quality, evidenced by a decrease in the absolute value of discretionary accruals. The improvement in financial reporting quality may lie in the fact that the firms with local ACCs more likely appoint Top10 auditors and/or hold more audit committee meetings. Furthermore, we find that local ACCs are associated with better accruals quality in firms with more opaque information environments and higher uncertainties in future prospects, and that the relation between local ACCs and better accruals quality is weakened in firms with powerful CEOs. Our findings suggest that the informational benefit derived from the geographic proximity of local ACCs outweighs the resultant agency effect on financial reporting.