Abstract
Based on the situation of customers change of the 27 accounting firms punished by China Securities Regulatory Commission (CSRC) in the capital market of China from 1999 to 2016, this paper found the CSRC punishment will cause those clients requiring high financial statement quality to change firm. However, the customers caring more about audit discount and long-term cooperation relationship with auditors will choose to stay. This shows that the intimate relationship between auditors and customers as well as audit cost discount can increase Switching Cost, thus offsetting "Signaling" effect and slowing the customer churn from firm which already received administrative penalty. However, the regulation does not change the fact that the financial report quality of remaining customers is not high.
Highlights
Since 1999, the China Securities Regulatory Commission (CSRC) has imposed penalties on several accounting firms, including Reanda and Baker Tilly
Using the accounting firms which received penalty from 1999 to 2016 in China’s capital market as research objects and their A-share listed company clients as sample, this paper aims to explore whether customers tend to abandon the original accounting firm after the firm is punished by CSRC by comparing the customer churn and preserving conditions before and after CSRC punishment, and discusses whether "Signaling Theory" can fulfill its function in China capital market
Is the "Signaling" effect more remarkable or the Switching Cost effect? This paper firstly study whether customer tend to leave after their firm has been punished by CSRC, and whether "Signaling" effect can work well in China’s capital market; Secondly, this paper studies the adjustment function of Switching Cost brought by audit discount and "auditor-customer" relationship on "Signaling" effect; this paper studies the financial statements quality change of remaining customers and lost customers after the punishment, revealing the real consequences of such adjustment function
Summary
Since 1999, the China Securities Regulatory Commission (CSRC) has imposed penalties on several accounting firms, including Reanda and Baker Tilly. Using the accounting firms which received penalty from 1999 to 2016 in China’s capital market as research objects and their A-share listed company clients as sample, this paper aims to explore whether customers tend to abandon the original accounting firm after the firm is punished by CSRC by comparing the customer churn and preserving conditions before and after CSRC punishment, and discusses whether "Signaling Theory" can fulfill its function in China capital market. It is the regulating effect of Switching Cost on "Signaling" effect decides whether the clients will change their firm. Our study shows that the regulation of capital market in China and is not invalid, but regulatory authorities need to make more efforts to make it more significant than the adjustment of Switching Cost By doing this can the regulation can be more effective. Our study reveals two important factors affecting Switching Cost: the audit fees and auditor-customer relationship, proving that in the current environment, audit fees and the auditor-customer relationship make effect on the firm's extension and customer retention
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