Underwriter–Auditor Relationship and Pre-IPO Earnings Management: Evidence from China

  • Xingqiang Du
  • Xu Li
  • Xuejiao Liu
  • Shaojuan Lai


This study examines the influence of underwriter–auditor relationship (UAR) on pre-initial public offering (IPO) earnings management. Using a sample of Chinese to-be-listed firms, we find that a close UAR, as reflected in repeated collaborations between an underwriter and an audit firm in IPOs, is positively associated with pre-IPO earnings management. This association is more pronounced for firms with politically connected auditors/underwriters, firms with less reputable auditors/underwriters, firms located in provinces with weak legal environment, firms to-be-listed on boards with lax listing requirements, and firms whose auditors are with low industry specialization, and legal liability exposures. We provide further evidence that UAR is associated with greater likelihood of irregular activities in post-IPO period and poorer post-IPO financial performance. To the extent that we control for alternative explanations and potential endogeneity, our results suggest that the collusion incentive is likely to drive repeated collaborations between underwriters and auditors in the Chinese IPO market. Our findings provide interesting implications for auditors, investors, and regulators seeking to understand the Chinese IPO market.


Underwriter–auditor relationship (UAR) Earnings management The collusion incentive Political connections Underwriter (auditor) reputation Legal environment 



We are grateful for the valuable comments from Hongqi Yuan, Bin Lin, Feng Liu, Shizhong Huang, Xiongyuan Wang, and workshop participants at Zhongnan University of Economics and Law. Prof. Xingqiang Du acknowledges financial support from the National Natural Science Foundation of China (the approval number: NSFC-71572162). Dr. Xuejiao Liu acknowledges financial support from the National Natural Science Foundation of China (the approval number: NSFC-71402025).


The authors acknowledge financial support from the National Natural Science Foundation of China (the approval numbers: NSFC-71572162; NSFC- 71402025).

Compliance with Ethical Standards

Conflict of Interest

The authors declare that they have no conflict of interest.


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Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  • Xingqiang Du
    • 1
  • Xu Li
    • 2
  • Xuejiao Liu
    • 3
  • Shaojuan Lai
    • 4
  1. 1.Accounting Department, School of ManagementXiamen UniversityXiamenChina
  2. 2.Faculty of Business and EconomicsThe University of Hong KongHong KongChina
  3. 3.School of BusinessUniversity of International Business and EconomicsBeijingChina
  4. 4.Xiamen National Accounting InstituteXiamenChina

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