The negative effect of regional banking competition on audit quality: evidence from China

Using Chinese A-share listed data from 2007 to 2020, we reveal that increased competition in the banking system impairs the audit quality of banks’ credit clients, which is attributed to the loss of bank supervision. For firms with poor corporate governance or information quality, firms that hire auditors with low independence or high catering motivation, or firms in an immature external environment, such negative effect is more prominent. Furthermore, we indicate that firms are prone to shop for favorable audit opinions under high banking competition. Overall, we illustrate the negative effect of banking competition on auditors and provide meaningful implications.