The Impact of Transportation Infrastructure Development on Auditor Effort and Audit Quality: Evidence from a Natural Experiment

Abstract

We rely on the launch of high speed railway (HSR) services in China as a natural experiment to examine the role that transportation infrastructure development plays in shaping auditor effort and audit quality. In a staggered difference-in-difference framework, we find that auditor effort evident in the number of days spent on the engagement rises after the launch of an HSR route to the city where the client is located. In measuring audit quality with restatements and discretionary accruals, we document that actual audit quality improves after HSR services become available. Consistent with capital market participants rewarding firms that narrow information asymmetry by improving accounting transparency, we find that the launch of the HSR program also leads to higher perceived audit quality in the form of clients enjoying cheaper borrowing costs and higher valuations. Our core results hold under extensive sensitivity analysis, including when we implement propensity score matching to control for variation in client characteristics and re-estimate the regressions for falsified HSR launch dates. Collectively, our evidence implies that improving transportation infrastructure to facilitate travel translates into auditors working harder on engagements and delivering stricter external monitoring of the financial reporting process.