Stock market openness and audit fees: evidence from the inclusion of China A-shares in the MSCI emerging markets index

Abstract

This study examines how China’s stock market openness affects audit fees. In May 2018, Morgan Stanley Capital International (MSCI) announced the first wave of listing of large-cap China A-shares in the MSCI Emerging Markets (EM) Index, which marked China’s grand entrance into the global investment benchmark, and sharply expanded its stock market investor base. Using a difference-in-differences approach, we find that audit fees for constituent stocks decrease after the index inclusion. Further analyses suggest that foreign investors can reduce the risk of expropriation by controlling shareholders and mitigate agency conflicts. Our results also show that the effect is more pronounced for firms with weaker internal controls, lower levels of domestic institutional ownership, and those located in less developed markets. Our findings highlight the monitoring effect of stock market openness in improving corporate governance and advance our understanding of the key drivers of audit fees in emerging markets.