How Audit Quality Affects Cash Holdings: Evidence from China

Abstract

This is one the maiden studies that aim to reveal the association between audit quality and cash holdings among non-financial firms in the unique context of China, that is a major developing economy. Although previous studies have looked at the wider impact of governance systems on cash holdings decisions, there isn't much research on the precise connection between audit quality and company cash holdings—particularly in China's developing economies. This study, which has bases in agency, auditing, and cash theories, makes an assertion that stronger audit quality has tendency to discourage managers from hoarding extra cash holdings, thereby highlighting the significance of audit quality to be an instrument for monitoring. This study employs ordinary least squares (OLS) regression and fixed effects (FE) models to examine the effects of audit quality variables on cash holdings. This study uses the generalized method of moments (GMM) model for robustness. It employs a large sample dataset comprising 20203 observations of Chinese non-financial enterprises for the period of 2003-2016. This study confirms that audit quality works as a monitoring device and discourages unnecessary accumulation of Chinese firms' cash holdings. Audit quality dimensions, the Big4 auditors, audit fees, and the fear of receiving an unclean audit opinion work as regulating forces that stop managers' unnecessary holdings of cash reserves. This study contributes to governance systems and cash holdings in China. It is a maiden one to comprehensively employ audit quality as a corporate governance mechanism to assess how it affects cash holdings.