Skip to main content
SpringerLink
Log in

Loan Guarantees, Corporate Social Responsibility Disclosure and Audit Fees: Evidence from China

  • Original Paper
  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This paper examines the relationship between loan guarantees and audit fees as well as the moderating effect of corporate social responsibility (CSR). We find that guaranteeing another entity’s debt significantly increases firms’ own audit fees. However, the disclosure of CSR information attenuates the fee-increasing effects of loan guarantees. A closer examination reveals that the role of CSR is attributable to the information effect rather than the signal effect. Our results are robust to the use of a quasi-natural experiment, a propensity score matching analysis, a Heckman two-stage treatment effect model and alternative proxies. This work makes new contributions to the current understanding of the consequences of loan guarantees, determinants of audit fees and value of CSR disclosure.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. At the end of 2016, 3052 firms were listed on the Chinese stock market while the number of enterprises in China amounted to approximately 14.62 million (China Statistical Yearbook, 2017). See http://www.csrc.gov.cn/pub/zjhpublic/G00306204/zqscyb/201703/t20170308_313308.htm and http://www.stats.gov.cn/tjsj/ndsj/2017/indexch.htm.

  2. For example, the Chinese Company Law, the CSR principles and the guidelines for CSR disclosure issued by the Shanghai and Shenzhen Stock Exchanges encourage companies to operate in accordance with social morals and business ethics, and to release CSR information in annual or standalone reports.

  3. To rule out the alternative explanation that it is related party transactions rather than the loan guarantee per se that lead to higher audit fees, we control this compounding effect in the regression model. The firm-specific measure of related party transaction (RPT) is defined as the total amount of all transactions with guarantees or pledges excluded, scaled by total assets (Al-Dhamari et al. 2018; Fang et al. 2018). Untabulated results show that the coefficient of the additional variate RPT is positive but not significant, while both the magnitude and significance of Totalgua are similar to those of the main test, supporting our predictions about the effect of loan guarantee activity on audit fees.

References

  • Al-Dhamari, R. A., Al-Gamrh, B., Ismail, K. N. I. K., & Ismail, S. S. H. (2018). Related party transactions and audit fees: The role of the internal audit function. Journal of Management and Governance, 22(1), 187–212.

    Google Scholar 

  • Attig, N., Ghoul, E., Guedhami, S., O., & Suh, J. (2013). Corporate social responsibility and credit ratings. Journal of Business Ethics, 117(4), 679–694.

    Google Scholar 

  • Ayers, S., & Kaplan, S. E. (1998). Potential differences between engagement and risk review partners and their effect on clients acceptance judgments. Accounting Horizons, 12(2), 139–153.

    Google Scholar 

  • Beaulieu, P. R. (1994). Commercial lenders’ use of accounting information in interaction with source credibility. Contemporary Accounting Research, 10(2), 557–585.

    Google Scholar 

  • Beaulieu, P. R. (2001). The effects of judgments of new clients’ integrity upon risk judgments, audit evidence, and fees. Auditing: A Journal of Practice and Theory, 20(2), 85–99.

    Google Scholar 

  • Beck, T., Klapper, L. F., & Mendoza, J. C. (2010). The typology of partial credit guarantee funds around the world. Journal of Financial Stability, 6(1), 10–25.

    Google Scholar 

  • Bénabou, R., & Tirole, J. (2010). Individual and corporate social responsibility. Economica, 77(305), 1–19.

    Google Scholar 

  • Berger, A. N., Frame, W. S., & Ioannidou, V. (2011). Tests of ex-ante versus ex-post theories of collateral using private and public information. Journal of Financial Economics, 100(1), 85–97.

    Google Scholar 

  • Berkman, H., Cole, R. A., & Fu, L. J. (2009). Expropriation through loan guarantees to related parties: Evidence from China. Journal of Banking and Finance, 33(1), 141–156.

    Google Scholar 

  • Bertrand, M., & Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance and managerial preferences. Journal of Political Economy, 111(5), 1043–1075.

    Google Scholar 

  • Brazel, J. F., Jones, K. L., & Zimbelman, M. F. (2009). Using non-financial measures to assess fraud risk. Journal of Accounting Research, 47(5), 1135–1166.

    Google Scholar 

  • Brick, I. E., & Palia, D. (2007). Evidence of jointness in the terms of relationship lending. Journal of Financial Intermediation, 16(3), 452–476.

    Google Scholar 

  • Cahan, S. F., & Sun, J. (2015). The effect of audit experience on audit fees and audit quality. Journal of Accounting, Auditing and Finance, 30(1), 78–100.

    Google Scholar 

  • Calcagnini, G., Farabullini, F., & Giombini, G. (2014). The impact of guarantees on bank loan interest rates. Applied Financial Economics, 24(6), 397–412.

    Google Scholar 

  • Carcello, J. V., & Palmrose, Z. A. (1994). Auditor litigation and modified reporting on bankrupt client. Journal of Accounting Research, 32, 1–30.

    Google Scholar 

  • Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4(4), 497–505.

    Google Scholar 

  • Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34(4), 39–48.

    Google Scholar 

  • Chang, S. J., & Hong, J. (2000). Economic performance of group-affiliated companies in Korea: Intragroup resource sharing and internal business transactions. Academy of Management Journal, 43, 429–448.

    Google Scholar 

  • Chen, F., Hou, Y., Richardson, G., & Ye, M. (2018). Auditor experience and the timeliness of litigation loss contingency disclosures. Contemporary Accounting Research, 35(2), 956–979.

    Google Scholar 

  • Chen, L., Srinidhi, B., Tsang, A., & Yu, W. (2012). Corporate social responsibility, audit fees, and audit opinions. Working paper, Virginia: George Mason University.

  • Chen, Y. G. (2004). The understanding on the origin of the risk-oriented audit approach and its development. China Accounting Review, 2, 58–63. (In Chinese).

    Google Scholar 

  • Cho, S., Lee, C., & Pfeiffer, R. (2013). Corporate social responsibility performance and information asymmetry. Journal of Accounting and Public Policy, 32(1), 71–83.

    Google Scholar 

  • Clarkson, P. M., Li, Y., Richardson, G. D., & Vasvari, F. P. (2011). Does it really pay to be green? Determinants and consequences of proactive environmental strategies. Journal of Accounting and Public Policy, 30(2), 122–144.

    Google Scholar 

  • Comeig, I., Fernández-Blanco, M. O., & Ramírez, F. (2015). Information acquisition in SME’s relationship lending and the cost of loans. Journal of Business Research, 68(7), 1650–1652.

    Google Scholar 

  • Cormier, D., Ledoux, M., & Magnan, M. (2011). The informational contribution of social and environmental disclosures for investors. Management Decision, 49(8), 1276–1304.

    Google Scholar 

  • Dhaliwal, D. S., Li, O. Z., Tsang, A. H., & Yang, Y. G. (2011). Voluntary non-financial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86(1), 59–100.

    Google Scholar 

  • Dhaliwal, D. S., Li, O. Z., Tsang, A. H., & Yang, Y. G. (2014). Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), 328–355.

    Google Scholar 

  • Dhaliwal, D. S., Radhakrishnan, S., Tsang, A. H., & Yang, Y. G. (2012). Non-financial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, 87(3), 723–759.

    Google Scholar 

  • Dybvig, P., Shan, S. C., & Tang, D. Y. (2011). Does informal finance help formal finance? Evidence from third party loan guarantees in china. Working Paper.

  • El Ghoul, S., Guedhami, O., Kwok, C. C., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance, 35(9), 2388–2406.

    Google Scholar 

  • Fang, J., Lobo, G. J., Zhang, Y., & Zhao, Y. (2018). Auditing related party transactions: Evidence from audit opinions and restatements. Auditing: A Journal of Practice and Theory, 37(2), 73–106.

    Google Scholar 

  • Feng, G. F., Ma, Y. J., & Yao, S. J. (2005). A positive analysis of guarantee behavior of Chinese listed companies. China Industrial Economy, 3, 13–21. (In Chinese).

    Google Scholar 

  • Fisman, R., & Wang, Y. (2010). Trading favors with Chinese business groups. American Economic Review, 100(2), 429–433.

    Google Scholar 

  • Frankel, R., & Li, X. (2004). Characteristics of a firm’s information environment and the information asymmetry between insiders and outsiders. Journal of Accounting and Economics, 37(2), 229–259.

    Google Scholar 

  • Gao, F., Ling, L. L., & Zhang, I. X. (2014). Commitment to social good and insider trading. Journal of Accounting and Economics, 57(s2-3), 149–175.

    Google Scholar 

  • Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53(1–2), 51–71.

    Google Scholar 

  • Ge, W., & Liu, M. (2015). Corporate social responsibility and the cost of corporate bonds. Journal of Accounting and Public Policy, 34(6), 597–624.

    Google Scholar 

  • Gonas, J. S., Highfield, M., & Mullineaux, D. (2004). When are commercial loans secured? Financial Review, 39, 79–99.

    Google Scholar 

  • Gong, Q., Li, O. Z., Lin, Y., & Wu, L. (2015). On the benefits of audit market consolidation: Evidence from merged audit firms. The Accounting Review, 91(2), 463–488.

    Google Scholar 

  • Goss, A., & Roberts, G. S. (2011). The impact of corporate social responsibility on the cost of bank loans. Journal of Banking and Finance, 35(7), 1794–1810.

    Google Scholar 

  • Groening, C. J., Kanuri, V., & Sridhar, S. (2011). Incongruency between corporate social responsibility and stakeholder outcomes: A study of immediate investor reaction to news of both positive and negative CSR activities. Working Paper, University Of Missouri.

  • Guiral, A. (2012). Corporate social performance, innovation intensity, and financial performance: Evidence from lending decisions. Behavioral Research in Accounting, 24(2), 65–85.

    Google Scholar 

  • Guiral, A., Guillamon, S. E., & Blanco, B. (2014). Are auditor opinions on internal control effectiveness influenced by corporate social responsibility. Retrieved from SSRN: http://ssrn.com/abstract=2485733.

  • Hay, D. (2013). Further evidence from meta-analysis of audit fee research. International Journal of Auditing, 17(2), 162–176.

    Google Scholar 

  • Hay, D. C., Knechel, W. R., & Wong, N. (2006). Audit fees: A meta-analysis of the effect of supply and demand attributes. Contemporary Accounting Research, 23(1), 141–191.

    Google Scholar 

  • Hermalin, B. E. (2001). Economics and corporate culture. In The International handbook of organizational culture and climate. U.K.: Wiley.

    Google Scholar 

  • Hoi, C. K., Wu, Q., & Zhang, H. (2013). Is corporate social responsibility (CSR) associated with tax avoidance? Evidence from irresponsible CSR activities. The Accounting Review, 88(6), 2025–2059.

    Google Scholar 

  • Houston, R. W., Peters, M. F., & Pratt, J. H. (1999). The audit risk model, business risk and audit-planning decisions. The Accounting Review, 74(3), 281–298.

    Google Scholar 

  • Houston, R. W., Peters, M. F., & Pratt, J. H. (2005). Non-litigation risk and pricing audit services. Auditing: A Journal of Practice and Theory, 24(1), 37–53.

    Google Scholar 

  • Hu, N., Wang, F. J., Wang, P., Yao, L. J., & Zhang, J. R. (2012). The impact of ultimate ownerships on audit fees: Evidence from Chinese listed companies. Asia-Pacific Journal of Accounting and Economics, 19(3), 352–373.

    Google Scholar 

  • Huang, H. W., Raghunandan, K., Huang, T. C., & Chiou, J. R. (2014). Fee discounting and audit quality following audit firm and audit partner changes: Chinese evidence. The Accounting Review, 90(4), 1517–1546.

    Google Scholar 

  • Huang, X., & Watson, L. (2015). Corporate social responsibility research in accounting. Journal of Accounting Literature, 34, 1–16.

    Google Scholar 

  • Jayaraman, S., & Milbourn, T. (2014). CEO equity incentives and financial misreporting: The role of auditor expertise. The Accounting Review, 90(1), 321–350.

    Google Scholar 

  • Jimenez, G., Salas, V., & Saurina, J. (2006). Determinants of collateral. Journal of Financial Economics, 81, 255–281.

    Google Scholar 

  • Kaptein, M., & Van Tulder, R. (2003). Toward effective stakeholder dialogue. Business and Society Review, 108(2), 203–224.

    Google Scholar 

  • Kim, Y., Li, H., & Li, S. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking and Finance, 43, 1–13.

    Google Scholar 

  • Kim, Y., Park, M. S., & Wier, B. (2012). Is earnings quality associated with corporate social responsibility. The Accounting Review, 87(3), 761–796.

    Google Scholar 

  • Kinney, W. R., & Mcdaniel, L. S. (1989). Characteristics of firms correcting previously reported quarterly earnings. Journal of Accounting and Economics, 11(1), 71–93.

    Google Scholar 

  • Kizirian, T. G., Mayhew, B. W., & Sneathen, L. D. (2005). The impact of management integrity on audit planning and evidence. Auditing: A Journal of Practice and Theory, 24(2), 49–67.

    Google Scholar 

  • Kreps, D. M. (1996). Corporate culture and economic theory. Cambridge, UK: Cambridge University Press.

    Google Scholar 

  • L’etang, J. (1995). Ethical corporate social responsibility: A framework for managers. Journal of Business Ethics, 14(2), 125–132.

    Google Scholar 

  • Lee, D. (2017). Corporate social responsibility and management forecast accuracy. Journal of Business Ethics, 140(2), 353–367.

    Google Scholar 

  • Leeth, J. D., & Scott, J. A. (1989). The incidence of secured debt: Evidence from the small business community. Journal of Financial and Quantitative Analysis, 24(3), 379–394.

    Google Scholar 

  • Liberti, J. M., & Sturgess, J. (2010). Uncovering collateral constraints. Understanding banks in emerging markets, London, 27–33.

  • Lin, L. W. (2010). Corporate social responsibility in China: Window dressing or structural change. Berkeley Journal of International Law, 28(1), 64–100.

    Google Scholar 

  • Liu, B., Cullinan, C., Zhang, J., & Wang, F. (2016). Loan guarantees and the cost of debt: Evidence from China. Applied Economics, 48(38), 3626–3643.

    Google Scholar 

  • Liu, X. N., & Zheng, R. M. (2005). Corporate performance, capital structure and credit guarantee. Journal of Financial Research, 4, 155–164. (In Chinese).

    Google Scholar 

  • Lu, C. W., & Chueh, T. S. (2015). Corporate social responsibility and information asymmetry. Journal of Applied Finance and Banking, 5(3), 105–122.

    Google Scholar 

  • Lu, L. Y., Shailer, G., & Yu, Y. (2017). Corporate social responsibility disclosure and the value of cash holdings. European Accounting Review, 26(4), 729–753.

    Google Scholar 

  • Lu, Y. F. (2009). Material misstatement risk of financial statements and audit pricing: Evidence from A-share stock market. Jinan University. (In Chinese).

  • Martínez, F. J., Gallegoa, A. I., & García-Sánchez, I. M. (2015). A bidirectional analysis of earnings management and corporate social responsibility: The moderating effect of stakeholder and investor protection. Australian Accounting Review, 25(4), 359–371.

    Google Scholar 

  • Menkhoff, L., Neuberger, D., & Suwanaporn, C. (2006). Collateral-based lending in emerging markets: Evidence from Thailand. Journal of Banking and Finance, 30(1), 1–21.

    Google Scholar 

  • Mola, S., Rau, P. R., & Khorana, A. (2012). Is there life after the complete loss of analyst coverage? The Accounting Review, 88(2), 667–705.

    Google Scholar 

  • Moser, D. V., & Martin, P. R. (2012). A broader perspective on corporate social responsibility research in accounting. The Accounting Review, 87(3), 797–806.

    Google Scholar 

  • O’Reilly, C., & Chatman, J. (1996). Culture as social control: Corporations, culture, and commitment. Research in Organizational Behavior, 18, 157–200.

    Google Scholar 

  • Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24(3), 403–441.

    Google Scholar 

  • Pong, C. M., & Whittington, G. (1994). The determinants of audit fees: Some empirical models. Journal of Business Finance and Accounting, 21(8), 1071–1095.

    Google Scholar 

  • Porter, M. E., & Kramer, M. R. (2006). The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78–91.

    Google Scholar 

  • Ramanna, K. (2013). A framework for research on corporate accountability reporting. Accounting Horizons, 27(2), 409–432.

    Google Scholar 

  • Régis, B., & Laurent, W. (2013). Why do banks ask for collateral in SME lending? Applied Financial Economics, 23(23), 1109–1122.

    Google Scholar 

  • Riding, A. L., & Haines, G. (2001). Loan guarantees: Costs of default and benefits to small firms. Journal of Business Venturing, 16, 595–612.

    Google Scholar 

  • Rosenbaum, P. R., & Rubin, D. B. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55.

    Google Scholar 

  • Schaub, M. K. (1996). Rust and Suspicion: The effects of situational and dispositional factors on auditors’ trust of clients. Behavioral Research in Accounting, 8, 154–174.

    Google Scholar 

  • Simunic, D. A. (1980). The pricing of audit services: Theory and evidence. Journal of Accounting Research, 18(1), 161–190.

    Google Scholar 

  • Stice, J. D. (1991). Using financial and market information to identify pre-engagement factors associated with lawsuits against auditors. The Accounting Review, 66(3), 516–533.

    Google Scholar 

  • Wang, L., & Juslin, H. (2009). The impact of Chinese culture on corporate social responsibility: The harmony approach. Journal of Business Ethics, 88(3), 433–451.

    Google Scholar 

  • Wang, L., & Tuttle, B. (2014). Using corporate social responsibility performance to evaluate financial disclosure credibility. Accounting and Business Research, 44(5), 523–544.

    Google Scholar 

  • Wang, X. L., Fan, G., & Ma, G. R. (2017). Business environment index for China’s provinces. Beijing: Social Science Academic Press.

    Google Scholar 

  • Whisenant, S., Sankaraguruswamy, S., & Raghunandan, K. (2003). Evidence on the joint determination of audit and non-audit fees. Journal of Accounting Research, 41(4), 721–744.

    Google Scholar 

  • Xie, Z. H., & Cui, X. G. (2006). Risk-based auditing: mechanism and application. China Accounting Review, 7, 15–20. (In Chinese).

    Google Scholar 

  • Yu, F. F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88(2), 245–271.

    Google Scholar 

  • Zhang, J. X., Chen, Y., & Wu, X. (2005). An analysis of risk factors on audit pricing: Evidence from shanghai stock exchange in 2003. Auditing Research, 4, 34–38. (In Chinese).

    Google Scholar 

  • Zhang, Q. F., Zhang, M., & Dai, J. J. (2006). Review of Chinese empirical research on audit pricing. China Accounting Review, 6, 87–93. (In Chinese).

    Google Scholar 

Download references

Funding

This study was funded by the Fundamental Research Funds for the Central Universities (Grant No. sk2018047) and the Natural Science Foundation of China (Grant No. 71472148).

Author information

Authors and Affiliations

  1. School of Management, Xi’an Jiaotong University, Xi’an, China

    Fangjun Wang, Luying Xu & Junrui Zhang

  2. College of Business, City University of Hong Kong, Hong Kong, China

    Luying Xu

  3. School of Management and Economics, North China University of Water Resources and Electric Power, Zhengzhou, China

    Fei Guo

Authors
  1. Fangjun Wang
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Luying Xu
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Fei Guo
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Junrui Zhang
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Fangjun Wang.

Ethics declarations

Conflict of interest

Dr. Fangjun Wang has received research grants from Xi’an Jiaotong University. Dr. Luying Xu, Dr. Fei Guo and Dr. Junrui Zhang declare that they have no conflict of interest.

Research Involving Human and Animal Rights

This article does not contain any studies with human participants or animals performed by any of the authors.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Wang, F., Xu, L., Guo, F. et al. Loan Guarantees, Corporate Social Responsibility Disclosure and Audit Fees: Evidence from China. J Bus Ethics 166, 293–309 (2020). https://doi.org/10.1007/s10551-019-04135-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-019-04135-6

Keywords

Search

Navigation