Positive externality of analyst coverage upon audit services: evidence from China

Abstract

Using China’s data, we find that analyst coverage helps reduce audit fees, and such effect is more pronounced for small firms, less-educated auditors, and small auditors. Our findings reveal positive externality of analyst coverage upon audit services in China, especially for those auditors weak in professional expertise, or hard to resist the pressure from their clients. Such evidence implies that the reputation protection hypothesis seems less applicable in an emerging market where the market share of big auditors is low. Our findings also provide alternative evidence justifying exchange-sponsored analyst coverage in practice intended to improve information environment of small firms.