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  4. July 2021
  5. Hometown Ties and the Quality of Government Monitoring: Evidence from Rotation of Chinese Auditors

American Economic Journal:
Applied Economics

ISSN 1945-7782 (Print) | ISSN 1945-7790 (Online)

Hometown Ties and the Quality of Government Monitoring: Evidence from Rotation of Chinese Auditors

  • Jian Chu
  • Raymond Fisman
  • Songtao Tan
  • Yongxiang Wang
American Economic Journal: Applied Economics
vol. 13, no. 3, July 2021
(pp. 176–201)
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Abstract

Audits are a standard mechanism for reducing corruption in government investments. The quality of audits themselves, however, may be affected by relationships between auditor and target. We study whether provincial chief auditors in China show greater leniency in evaluating prefecture governments in their hometowns. In city-fixed-effect specifications―in which the role of shared background is identified from auditor turnover―we show that hometown auditors find 38 percent less in questionable monies. This hometown effect is similar throughout the auditor's tenure and is diminished for audits ordered by the provincial Organization Department as a result of the departure of top city officials. We argue that our findings are most readily explained by leniency toward local officials rather than an endogenous response to concerns of better enforcement by hometown auditors. We complement these city-level findings with firm-level analyses of earnings manipulation by state-owned enterprises (SOE) via real activity manipulation (a standard measure from the accounting literature), which we show is higher under hometown auditors.

Citation

Chu, Jian, Raymond Fisman, Songtao Tan, and Yongxiang Wang. 2021. "Hometown Ties and the Quality of Government Monitoring: Evidence from Rotation of Chinese Auditors." American Economic Journal: Applied Economics, 13 (3): 176–201. DOI: 10.1257/app.20190516

Additional Materials

JEL Classification

  • D73 Bureaucracy; Administrative Processes in Public Organizations; Corruption
  • H54 National Government Expenditures and Related Policies: Infrastructures; Other Public Investment and Capital Stock
  • H83 Public Administration; Public Sector Accounting and Audits
  • L32 Public Enterprises; Public-Private Enterprises
  • M42 Auditing
  • O18 Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
  • P25 Socialist Systems and Transitional Economies: Urban, Rural, and Regional Economics
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