Strategic deviance and auditor selection

Abstract

Using data of Chinese A-share non-financial listed companies spanning years 2003–2018, we examine whether a firm’s business strategy that deviates from industry conventions influences corporate governance mechanisms, particularly the probability of choosing high-quality external auditors. We document a significantly positive correlation between a firm’s strategic deviance and high-quality auditor engagement. The exacerbation of agency conflict is an important driver for firms with strategic deviance to hire high-quality auditors. Moreover, we find evidence that hiring Big 4 auditors can curb earnings management and capital occupation of major shareholders in firms with a deviant strategy. We conclude that strategically deviant firms hire high-quality auditors due to agency conflicts.