The effect of hedge fund activism on audit quality: evidence from China

Abstract

ABSTRACT This article empirically analyzes the impact of hedge fund activism on audit quality in emerging markets represented by China. It is found that hedge fund holding can significantly improve the audit quality of listed companies, but the above-mentioned effect is limited to private enterprises and companies with dispersed equity, yet not significant in state-owned enterprises (SOEs) and companies with concentrated equity. In addition, hedge fund activism becomes more prominent when auditors and analysts fail to play a governance role. Further tests show hedge funds influence audit quality through certain activism campaigns. We also use instrumental variable (IV) and propensity score matching method (PSM) to alleviate the endogeneity problem. The conclusion of this article contributes empirical evidence from emerging markets to the controversial topic of hedge fund activism.