Trade Credit Insurance, Earnings Quality and Auditor Selection

• In Event: Financial Reporting--Quality

Abstract

We examine whether trade insurance claims are associated with firms’ decisions on earnings quality and auditor selection with unique trade credit insurance data in China. High insurance claims imply an increasingly unseen firm risk related to cash flows, accounts receivable management, and earnings, which may affect earnings quality and auditor selection. In this study we find that firms with higher insurance claims are associated with lower earnings quality, more likely to select small audit firms as their auditors, and pay higher audit fees. We also uncover that the positive association between the insurance claims and clean audit opinions is more pronounced for firms that choose small auditors. Our results are robust to a variety of controls and alternative measures.

Authors

• Songsheng Chen, Beijing Institute of Technology

• Jun Guo, Rutgers University - Camden

• Liyuan Yan, Renmin University of China

• Yingying Tian, Renmin University of China