This study examines the impact of an initial public offering (IPO) examination disclosure on accountants' IPO market share, using accounting firms undertaking A-share approval system IPO audit projects from 2011 to 2021. We find that the IPO market share of accounting firms with Issuance Examination Committee Connections (IECC) decreases after the implementation of the issuance examination disclosure policy and that the market share decrease is more pronounced for low-reputation accounting firms with IECC. This study reveals the impact of issuance review disclosures on the appointment of accountants by IPO firms. This study extends the research related to accountants' market share from the perspective of the impact of IPO examination disclosure on the IPO market share of IECC accountants.

1 INTRODUCTION

To comprehend the problems of China's economy in the “emerging and transitioning” period, it is necessary to examine both the formal and informal systems, as the informal system is likely to occupy a more important position in China's capital market (Allen et al., 2005; Chen et al., 2013). As an informal system, the affiliation between an initial public offering (IPO) company and the Issuance Examination Committee (IEC) plays an important role in the successful passing of the IPO examination by the IEC.

Prior to the registration system, the IPO system implemented in the Chinese securities market was an approval and authorisation system under government control. In the context of the approval system, the issuance of new shares was subject to two examination stages: a preliminary examination by the Issuance Department of the China Securities Regulatory Commission (CSRC) and a final ruling by the IEC, which is empowered by law. The information about the IPO audit was not disclosed to the public before 2015. Members of the Issuance Examination Committee are mainly composed of professionals from the CSRC and relevant experts from accounting firms and law firms. Since underwriters have the responsibility of sponsoring IPO companies, the CSRC stipulates that underwriters cannot serve as members of the Issuance Examination Committee. Although the CSRC stipulates that accountants serving as members of the Issuance Examination Committee shall recuse themselves from the IPO audit of the IPO company that their firm is responsible for auditing, the IPO company may hire an accounting firm that has had an accountant serve as a member of the Issuance Examination Committee as an auditing organisation, which constitutes the affiliation between the IPO company and the Issuance Examination Committee. In a scenario where IPO audit information is not disclosed to the public, the IPO company's relationship with the Issuance Examination Committee through the accountant can enable the IPO company to obtain valuable private information that is difficult to obtain through public channels. Private information, such as the personal preferences of other Issuance Examination Committee members. Grasping such private information is undoubtedly beneficial to IPO companies in preparing IPO application materials and writing prospectuses, and it also helps IPO companies submit IPO applications in a timely manner in accordance with the IPO policy of the CSRC. Thus, the association that IPO companies obtain with the Issuance Examination Committee can improve the probability of passing the IPO application (Ding et al., 2015; Li & Zhou, 2016; Liu et al., 2013).

In addition, according to the theory of “capture” of government regulation, regulators, as limited rational beings, are subject to asymmetric regulatory information and the absence of effective incentives and disincentives for regulators. Since regulators do not derive private benefits from regulation, interest groups seek rent from regulators to benefit them. As a result, regulators do not really aim to safeguard the public interest, which may lead to government regulatory failure (Buchanand, 1986). The final judgement of the IEC on the review and approval of IPOs is mandatory, and the Committee can selectively favour or restrict certain specific industries. As a result, interest groups may try to lobby or even seek rent from the regulator to maximise their interests (Stigler, 1971; Viscusi et al., 2000).

Existing studies have found that the power and position of the Issuance Examination Committee make the social network relationship between intermediaries and Issuance Examination Committee members an important factor influencing the passing rate of IPO companies (Chen et al., 2014). Thus, IECC becomes an essential social capital (Chen et al., 2014) that can bring actual or potential benefits to accountants (Bourdieu, 1980).

To limit the power of the IEC, prevent possible collusion between IPO companies as well as intermediaries and the IEC, and enhance the transparency of the whole process of IPO examination, the CSRC formally implemented on 23 January 2015 a system of public disclosure of the IEC on its official website. Regulatory information disclosure conveys to the securities market messages about the regulator's IPO examination, which helps market participants monitor the regulator, constrains the regulator's discretionary authority, delineates the regulator's power boundaries, and reduces “rent-seeking” behaviour in IPO issuance (Ma, 2014). The issuance examination disclosure system also mitigates information asymmetry in IPOs, undermining the value of private examination information held by the IEC (Kolstad & Wiig, 2009; Ma, 2014; Li & Liu, 2017). In addition, information disclosures on issuance examinations also help market participants supervise the regulator, constrain the regulator's discretionary power, delineate the regulator's power boundaries, and reduce the power of “rent-seeking” behaviour in the issuance of new shares (Stigler, 1971; Viscusi et al., 2000), so that the value of the social capital of the issuance review committee's affiliated accountants is weakened and reducing the value of social capital of Issuance Examination Committee-affiliated accountants. Although the existing literature has explored the positive impact of Issuance Examination Committee affiliation on accountants' market share acquisition in the Chinese market, little literature has explored the impact of public disclosure of IPO audit information on the market share of IPO audits by accountants with Issuance Examination Committee affiliation.

Accountants' reputation, as a form of social capital developed over a long period of auditing practice, can bring additional benefits to accountants. As a result, accountants have an incentive to maintain their reputation, and high-reputation accountants are unlikely to degrade the quality of their audits in response to their clients' special requirements (Krishnan, 2003). Public disclosure of IPO examination information reduces the value of IECC social capital, and IPO firms may have less demand for IECC accountants. In contrast, IPO firms employing high-reputation accountants can signal to external stakeholders the high quality of the firm (Brau & Johnson, 2009) and hedge against possible IPO audit risks (Lee & Mande, 2003). However, the existing literature does not test the impact of IPO audit disclosure on the market share of high-reputation audit accountants and low-reputation accountants.

Based on the social network theory, government controlling theory, and reputation theory, this study examines the impact of the issuance examination disclosure system on accountants' IPO market share in the context of the approval system by examining accounting firms that had undertaken A-share approval system IPO auditing projects during the period 2011–2021, taking the official implementation of public disclosure of IPO audit information in 2015 as the time point. The study finds that the IPO market share of accounting firms with Issuance Examination Committee affiliation is higher before the public disclosure of IPO audit information, while the market share of accounting firms with Issuance Examination Committee affiliation decreases after the implementation of the public disclosure of IPO audit information, and in particular, the market share of accounting firms with low reputation with Issuance Examination Committee affiliation decreases to a greater extent. This study not only enriches the literature on the factors affecting the market share of accounting firms but also reveals the impact of public disclosures on issuance examinations on the behaviour of accountants employed by IPO companies, providing a theoretical basis for further improving the system of public disclosures on issuance examinations and reinforcing the supervision of intermediaries.

This paper makes three key contributions. First, existing studies on accountants' IPO audit market share focus on audit independence (DeFond et al., 2000), accounting firm size (Wang et al., 2008), accountants' reputation (Brau & Johnson, 2009), and audit fees (Wang et al., 2009). Although some scholars have tested the relationship between IECC and accountants' market share (Zhu et al., 2004), very few studies explore the effect of public disclosure of IPO examination information on the IPO market share of IECC accountants. We analyse and test the impact of IPO examination disclosure on the social capital value of IECC accountants and further tested the differences in the impact of public disclosure of IPO review information on the market share of high and low-reputation accountants associated with Issuance Examination Committees (IECCs), thus expanding the relevant research on the factors influencing accountants' IPO market share. Second, the existing literature argues that information disclosure can alleviate the information asymmetry between the government and the public and regulate the boundaries of government power (Islam, 2006). However, the literature focusing on the constraints of IPO examination disclosure on the power of the IEC, and thus the economic consequences for IECC accountants, is scarce. As such, this paper enriches the literature on the economic consequences of government information disclosure from this perspective. Third, the U.S. Securities and Exchange Commission (SEC) focuses mainly on IPO firms' financial disclosure during the IPO examination process (Bozanic et al., 2017), and the SEC's inquiries are publicly disclosed only 20 days (45 days before 2012) after the completion of the SEC's full examination process. CSRC IPO examination inquiries include both financial disclosure of IPO firms and non-financial information such as IPO corporate governance and connected transactions, and CSRC IPO examination inquiry information is disclosed in a timely manner. Based on the characteristics of IPO examination inquiries from the Chinese context, this study analyses and examines the impact of public disclosure of IPO information on the market share of IECC accountants, thereby expanding on the literature regarding the economic consequences of public disclosure of IPO examination inquiries in emerging securities markets.

2 THEORETICAL ANALYSIS AND HYPOTHESIS DEVELOPMENT

The final ruling on IPO applications, given to the IEC by law, represents a typical IPO approval system under government control.1 The government controlling theory suggests that government regulations are designed to safeguard the public interest (Burgess, 1995). The purpose of government regulation on the eligibility of IPOs is to ensure the quality of the companies financed in the stock market and the reasonableness of the price of the shares issued in the public interest. Cattaneo et al. (2015) indicate that government regulation in IPOs plays a positive role. However, regulators are not completely rational, which can potentially lead to regulatory failure (Keynes, 1937; Smith, 1776). The “capture” theory of government regulation suggests that, as a limitedly rational regulator, in the presence of asymmetric regulatory information, the regulator may also be “captured” by certain interest groups, which reduces the efficiency of the regulation and may consequently lead to a failure of government regulation (Buchanand, 1986). Existing research demonstrates that companies proposing to issue IPOs often try to establish IECC through various formal and informal means in order to gain approval from the IEC (Du et al., 2013). The power and position of the IECC make the social relationship between intermediaries and IEC members an important factor affecting the pass rate of IPO companies (Chen et al., 2014). As a result, under information asymmetry, IEC members may be “captured” by certain interest groups, thus reducing the efficiency of IPO review.

In order to avoid the negative impacts of the IECC and to improve the transparency of stock issuance review, China's securities regulators have carried out a number of reforms to the IEC system. For example, accountants appointed by the CSRC as IEC members are required to completely disassociate themselves from their former accounting firms and thus work exclusively for the IEC (Du et al., 2013); if the work unit to which an IEC member belongs has provided underwriting, auditing, and appraisal services to an IPO applicant over the past 2 years, the accountant cannot be involved in the review and approval of the IPO application directly. The introduction of these IEC member disqualification systems has, to a certain extent, achieved the effect of regulating behaviour.

However, social network relationships are ubiquitous in financial markets (Allen & Babus, 2009), and more IPO resources can be obtained through the accounting or law firms retained to help IPO firms structure their IEC connections (Chen et al., 2008).2 When there are partners in the accounting firm responsible for the IPO audit who are members of the IEC (Du et al., 2013), or when partners in the accounting firms retained by other issuance applicants underwritten by the IPO underwriters are members of the IEC, these IECC accountants can help the IPO applicants to construct a direct or indirect affiliation with the IEC (Huang & Xie, 2016).

Members of the IEC have access to a large amount of private information about the dynamics of IPO review, the focus of the IEC on the prospectus, the flexible handling techniques of important matters, and even the personal preferences of other IEC members. IPO companies with IECC can obtain such private information through accountants in a direct or indirect way, which is undoubtedly conducive to the targeted preparation of IPO application materials and writing of prospectus and other materials. This information also helps IPO companies to submit their applications in a timely manner in accordance with the IPO policy of the CSRC, which in turn will improve their likelihood of passing the IPO examination.

In addition, firms obtain private information about IPO examinations through IECC accountants, which facilitates their “rent-seeking” from IEC members. According to the regulatory capture theory, regulators may be “captured” by interest groups (Buchanand, 1986). Other IEC members who are directly involved in the IPO examination and have a background as accountants may also be “captured” due to some hidden interests.

Accountants, as an important external monitoring mechanism to ensure that IPO companies provide high-quality accounting information, play a crucial role in improving the efficiency of IPO examination and the quality of IPO companies, as well as in improving the efficiency of resource allocation in the capital market (Balsam et al., 2003; Krishnan, 2003; Zhang & Lei, 2020). As the “gatekeepers” of the securities market, accountants' main responsibility is to urge IPO companies to provide investors and other stakeholders with true and reliable information and to alleviate the information asymmetry between IPO companies and investors. Accountants use their own reputation as a guarantee to assure investors of the quality of the securities issued, which also reduces the risk of investors being induced by false or incorrect information.

However, China's IPO audit market is regulated by the government, and only accountants and accounting firms with IPO audit qualifications are allowed to undertake audits of IPO companies. Due to the competitive environment of the auditing market, accountants are often in a selective situation when undertaking IPO audits, and IPO companies are more inclined to appoint IECC accountants in order to increase their likelihood of passing the IPO examination. Further, the greater the gap between IPO companies and the listing standards, the more motivated IPO companies are to appoint IECC accountants. As a result, IECC accountants are preferred by IPO companies (Zhu et al., 2004).

Accountants can obtain higher audit fees by undertaking IPO audit engagements for companies that do not currently meet listing standards, thereby helping to reduce the risk of IPO rejection by the IEC (Chen et al., 2014; Fang et al., 2020; Yang, 2013). Obviously, IECC accountants are more willing to undertake IPO audit engagements that conform with listing standards (Zhang, 2005). Thus, the social capital formed by IECC accountants can bring them more IPO audit business. In view of this, we propose Hypothesis 1:

H1.Other conditions being unchanged, accounting firms with IECC accountants have a higher IPO market share compared to those without IECC.

The law gives the IEC the power of final judgement in IPO examination, which is, in fact, the IEC acting as a proxy for the government in exercising supervision over IPO applicant companies and substituting for investors in judging the investment value of the IPO companies. Whether the IEC can fulfil its fiduciary duties to the government and investors and safeguard the public interest of society depends on the self-discipline and fair supervision of the IEC members. However, due to the limited rationality of IEC members arising from an unsound incentive and constraint mechanism, some level of supervision “failure” is inevitable. In order to regulate the behaviour of the IEC in IPO examination (restraining it from abusing the examination power conferred by law and preventing the occurrence of “collusion” between the IPO company and IEC-associated intermediaries), public disclosure of IPO examination disclosure can undoubtedly play a role in restraining the behaviour of IEC members. Therefore, on 23 January 2015, the CSRC officially implemented the IEC examination disclosure on its official website.

Regulatory information disclosure, as a binding mechanism, helps market participants to supervise the regulator, effectively restrains the regulator's discretion, delimits the regulator's power boundaries, and reduces the occurrence of “collusion” between the regulator and the regulated and “rent-seeking” behaviour to the detriment of the public interest (Islam, 2006). After the disclosure of IPO examination information, the CSRC conducts several rounds of inquiries when examining companies that intend to issue new shares. IPO companies need to respond to the CSRC's inquiries in a timely manner, and the contents of the inquiry letters and response letters are disclosed in a timely and public manner on the CSRC's website. The disclosure of IPO examination information reduces the value of the social capital of IECC and thus weakens IECC accountants' ability to obtain a higher share of auditing business.

In addition, under the scenario of public disclosure of examination information, the behaviour of the IEC is restrained, and the efficiency of supervision is improved. If an accountant undertakes the audit of an IPO company that does not meet the listing criteria, it will inevitably affect the accountant's reputation in the auditing market and may even bring corresponding legal risks. In order to avoid possible reputational loss and legal risks, IECC accountants are more inclined to voluntarily give up IPO audit business that does not meet the listing criteria, resulting in a reduction in the total amount of IPO audit business for these accountants. In view of this, we propose Hypothesis 2:

H2.Other conditions being unchanged, the market share of IECC accountants decreases after the implementation of the IPO examination disclosure system.

The reputation of accountants comprises the overall perception and evaluation by the public and stakeholders of the activities of accounting firms and individual accountants in protecting the interests of investors and upholding professional ethics (Zhang & Lu, 2012). Accountant reputation is composed of accounting firm size, accountant industry expertise, and other aspects. Large accounting firms and accountants with industry expertise typically have a high reputation (Kanagaretnam et al., 2010; Li & Liu, 2017; Magnis & Iatridis, 2017). An accountant's reputation, as a form of social capital developed over a long period of time in the audit practice, can bring additional benefits to the accountant. Thus, accountants have an incentive to maintain their reputation, and high-reputation accountants are unlikely to reduce their audit quality due to the special requirements of their clients (Krishnan, 2003).

It has also been shown that although low reputation accountants are not effective in disciplining their clients' earnings management (Chen et al., 2011), low reputation accountants with IECC can get IPO firms through IPO examination, and the IPO auditing market share and IPO auditing fees they obtain are higher (Chen et al., 2014; Fang et al., 2020; Yang, 2013). DeFond et al. (2000) find that following more stringent audits of the top 10 accounting firms in China, the independence of non-top 10 accounting firms decreases accordingly, while market share, especially in the IPO market, increases. However, the social capital value of IECC accountants has decreased in the context of public disclosure of IPO examination, and IPO firms tend to favour hiring high-reputation accountants to signal the high quality of the firm to the outside world (Brau & Johnson, 2009). In addition, hiring high-reputation accountants is associated with high-quality services for IPO firms and the improvement of the quality of IPO firms' disclosures, which in turn can increase the likelihood of passing the IPO examination. Thus, in the context of public disclosure of IPO examination information, IPO firms are more inclined to engage high-reputation accountants.

In addition, after the implementation of the IPO examination disclosure system, the legal risk of undertaking low-quality IPO company audits by IECC accountants has increased significantly, and low-level IECC accountants are likely to drop the auditing business of low-quality IPO companies in order to avoid the possible IPO auditing risk, which will also lead to a reduction in the market share of low reputation accountants in IPO auditing.

Working with high-reputation accountants not only improves the quality of underwriters' sponsorship but also enables underwriters to avoid the legal risks associated with irregular accounting disclosure (Lee & Mande, 2003; Zhang & Lei, 2020). In the context of public disclosure of the IEC, the social capital value of IECC accountants is reduced, and underwriters are more inclined to cooperate with high-reputation accountants based on the consideration of circumventing the legal risk of underwriting IPOs, which results in a crowding-out effect on low-quality IECC accountants. In view of this, we propose Hypothesis 3:

H3.Other conditions being unchanged, the market share of low-reputation IECC accounting firms decreases significantly after the implementation of the IPO examination disclosure system.

3 RESEARCH DESIGN

3.1 Sample selection

The Issuance Examination Committee system in the Chinese market began in 2011, but it was not until 13 May 2015 that public disclosures on issuance examinations began to be implemented; thus, this study uses 13 May 2015 as the time point for information disclosures on issuance examinations. This study utilises accounting firms that had undertaken A-share approval system IPO audit projects from 2011 to 2021 as the research object. The initial sample for this paper is 299 CPA firm-year observations from 63 CPA firms, and after removing missing values, we end up with 253 CPA firm-year observations from 51 CPA firms. In order to avoid the influence of extreme values and outliers on the regression results, all continuous variables were Winsorised up and down by 1%.

Accounting firm information is collected manually through the “Top 100 Accounting Firms Comprehensive Evaluation Information” issued by the China Institute of Certified Public Accountants (CICPA) every year and the official websites of accounting firms. Issuance Examination Committee members were obtained from the Wind database and iFinD database. Other financial data are mainly obtained from CSMAR, Wind database, and iFinD database.

3.2 Model design and variable definitions

To test Hypothesis 1, model (1) is constructed as follows:

{Marketshare}_{i, t} = α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Controls}_{i, t} + ε_{i, t} .

()

To test Hypothesis 2, model (2) is constructed as follows:

\begin{matrix} {Marketshare}_{i, t} = & α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Post}_{i, t} \\ + α_{3} {AuditorRelation}_{i, t} * {Post}_{i, t} + α_{4} Contr o {ls}_{i, t} + ε_{i, t} . \end{matrix}

()

To test Hypothesis 3, model (3) is constructed as follows:

\begin{matrix} {Marketshare}_{i, t} = α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Post}_{i} + α_{3} Aud_{reputation}_{i, t} + α_{4} {AuditorRelation}_{i, t}^{*} {Post}_{i, t} \\ + α_{5} Aud_{reputation}_{i, t}^{*} {Post}_{i, t} + α_{6} {AuditorRelation}_{i, t}^{*} Aud_{reputation}_{i, t} \\ + α_{7} {AuditorRelation}_{i, t}^{*} {Post}_{i, t}^{*} Aud_{reputation}_{i, t} + α_{8} {Controls}_{i, t} + ε_{i, t} . \end{matrix}

()

In the model, subscript i is the accounting firm, and t is the year. The explained variable Marketshare_i,t is the IPO market share of accounting firms. AuditorRelation_i,t denotes the dummy variable of whether accounting firms have IECC affiliation or not, which takes the value of 1 if the accounting firms hired by the listed companies of the proposed issuance have IECC affiliation, and 0 otherwise; Post_i,t is the dummy variable before and after the implementation of the policy Aud_reputation_i,t is a dummy variable for the level of reputation of accounting firms, taking the value of 0 if the accounting firms are ranked in the top 10 and 1 otherwise. Controls_i,t is a series of control variables at the accounting firm level. Detailed variable definitions are shown in Table 1, and ε_i,t is a random perturbation term. In addition, this paper controls for year-fixed effects. To make the statistical inference results more robust, this paper uses robust standard errors to estimate the regression model.

TABLE 1. Variable definitions.

Variable type	Name	Sign	Definition
Main variable	IPO Market Share	Marketshare	Revenue from IPO audits by an accounting firm/Total revenue from IPO audits by all accounting firms
	Accountants' IECC	AuditorRelation	1 if any partner of an accounting firm serves as an Issuance Examination Committee member in the CSRC (i.e., the accounting firm is considered to have IECC accountants), otherwise 0.
	Low Reputation Accounting Firm	Aud_reputation	1 if the accounting firm is not a top 10 accounting firm, 0 otherwise.
	Before and after IPO examination disclosure	Post	1 if the date of the Issuance Examination Committee meeting is after 13 May 2015, otherwise 0.
Control variables	IPO audit income	lnIPOincome	Natural logarithm of IPO audit revenue for an accounting firm.
	Financial report audit income	lnIncome	Natural logarithm of financial report audit revenue for an accounting firm.
	Non-standard unmodified audit opinion	ModifiedOpinion	Number of non-standard unmodified audit opinions issued by an accounting firm.
	Year of Establishment	lnAge	Natural logarithm of the number of years the accounting firm has been established.
	Number of Certified Public Accountants	lnCPAnum	Natural logarithm of the number of CPAs in an accounting firm.

3.3 Focal variable

IPO Market Share (Market share): measured by the ratio of an accounting firm's IPO audit revenue to the total IPO audit revenue of all accounting firms, which is calculated as follows: IPO audit revenue of an accounting firm/total IPO audit revenue of all accounting firms.

3.4 Explanatory variables

Accountants' IECC (AuditorRelation): 1 if any partner of an accounting firm serves as an Issuance Examination Committee member in the CSRC (i.e., the accounting firm is considered to have IECC accountants); otherwise 0.

Low Reputation Accounting Firm (Aud_reputation): 1 if the accounting firm is not a top 10 accounting firm; 0 otherwise.

Before and after IPO examination disclosure (Post): 1 if the date of the Issuance Examination Committee meeting is after 13 May 2015 (i.e., after the issuance of examination disclosure); otherwise 0.

3.5 Control variables

Drawing on existing studies (Wang et al., 2009; Hu, 2015), the following control variables are selected in relation to accounting firms' business income, audit opinion, and firm characteristics, specifically IPO audit income (lnIPOincome), financial report audit income (lnIncome), non-standard unmodified audit opinion (ModifiedOpinion), year of establishment (lnAge), number of Certified Public Accountants (CPA) (lnCPAnum), and the dummy variable year (Year). Detailed variable definitions are provided in Table 1.

4 EMPIRICAL RESULTS AND ANALYSIS

4.1 Descriptive statistics

The descriptive statistics of the main variables are presented in Table 2. The minimum value of Marketshare is 0.001, the maximum value is 0.291, and the mean value is 0.0370, which indicates that there is a significant difference in the market share of accounting firms in the sample. Aud_reputation has a mean value of 0.601, indicating that there is a 60.1% share of low-reputation accounting firms in the sample. The mean value of AuditorRelation is 0.569, indicating that the proportion of IECC accountants in the sample is 56.9%. The mean value of Post is 0.676, indicating that 67.6% of the sample relates to the period after the issuance of examination disclosure.

TABLE 2. Descriptive statistics.

Variables	Sample size	Mean	Std. dev.	Min	Median	Max
Marketshare	253	0.0370	0.0560	0.001	0.0160	0.291
Aud_reputation	253	0.601	0.491	0	1	1
AuditorRelation	253	0.569	0.496	0	1	1
Post	253	0.676	0.469	0	1	1
lnIPOincome	253	7.333	1.283	4.745	7.272	10.19
lnIncome	253	11.17	1.205	8.545	11.10	13.16
ModifiedOpinion	253	2.996	5.577	0	1	33
lnAge	253	2.168	0.775	0	2.197	4.407
lnCPAnum	253	6.367	0.769	4.605	6.474	7.756

4.2 Regression results and analysis

Column (1) of Table 3 reports the results of the test of the relationship between IECC and accounting firms' IPO market share. The results show that the coefficient of AuditorRelation is 0.009 and is significantly positive at the 10% level. This indicates that there is a positive relationship between the association of accountants' IECC and the IPO market share of accounting firms before the public disclosure of the issuance information. This means that IECC accountants have a higher IPO market share, and thus Hypothesis 1 is verified.

TABLE 3. IECC, issuance examination disclosure, and IPO market share.

	Marketshare	Marketshare	Marketshare
AuditorRelation	0.009*	0.022***	0.005
AuditorRelation	(1.80)	(3.37)	(0.47)
Post		0.002
Post		(0.13)
AuditorRelationPost*		−0.018**	0.007
AuditorRelationPost*		(−2.07)	(0.40)
Aud_reputation			−0.023***
Aud_reputation			(−2.83)
Aud_reputationPost*			0.004
Aud_reputationPost*			(0.41)
Aud_reputationAuditorRelation*			0.027***
Aud_reputationAuditorRelation*			(2.61)
Aud_reputationPostAuditorRelation			−0.040**
Aud_reputationPostAuditorRelation			(−2.11)
lnIPOincome	0.034***	0.035***	0.035***
lnIPOincome	(11.03)	(11.01)	(11.14)
lnIncome	−0.013***	−0.013***	−0.017***
lnIncome	(−3.74)	(−3.52)	(−3.65)
ModifiedOpinion	−0.000	−0.000	0.000
ModifiedOpinion	(−0.19)	(−0.25)	(0.26)
lnAge	−0.003	−0.003	−0.005**
lnAge	(−1.37)	(−1.41)	(−2.15)
lnCPAnum	0.024***	0.022***	0.018***
lnCPAnum	(4.16)	(3.79)	(3.44)
_cons	−0.197***	−0.209***	−0.127***
_cons	(−7.79)	(−8.03)	(−3.34)
Year FEs	Yes	Yes	Yes
N	253	253	253
R ²	0.653	0.657	0.677

Note: The t-values reported in parentheses are based on robust standard errors and firm-level clustering (cluster); *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

Column (2) of Table 3 reports the test results of the effect of the implementation of the issuance disclosure system on the relationship between IECC and accounting firms' IPO market share. The results show that the regression coefficient of the interaction term AuditorRelation*Post is −0.018 and significantly negative at the 5% level, indicating that the IPO market share of IECC accounting firms decreases after the implementation of the disclosure system of issuance examination information. Thus, Hypothesis 2 is verified.

Column (3) of Table 3 reports the results of the test of the effect of the implementation of the issuance examination disclosure system on the relationship between IECC accountants and low-reputation accounting firms' IPO market share. The results show that the regression coefficient of the interaction term Aud_reputation*Post*AuditorRelation is −0.040 and significantly negative at the 5% level. This indicates that the market share of low-reputation IECC accounting firms is lower after the implementation of the issuance information disclosure system. Thus, Hypothesis 3 is verified.

4.3 Robustness tests

The following tests were conducted to examine the robustness of the findings.

4.3.1 Instrumental variables test (IVT)

Referring to the study by Gippel et al. (2015), we supplement the instrumental variables test to alleviate the endogeneity problem in this study. Since the address of the CSRC Issuance Examination Committee is located in Beijing, and the SSE and SZSE are located in Shanghai and Shenzhen, respectively, accounting firms located in these three cities are more likely to be associated with members of the CSRC Issuance Examination Committee. To mitigate the endogeneity problem, this paper adopts the location of accounting firms' headquarters as an instrumental variable for accounting firms' Issuance Examination Committee affiliation. Specifically, the instrumental variable takes the value of 1 if the headquarters location of the accounting firm is located in Beijing, Shanghai, or Shenzhen, and 0 otherwise. The empirical results are shown in Table 4. The Cragg–Donald Wald F statistic is 40.835, 65.575, and 31.270, respectively, which is greater than the Stock–Yogo test at the 10% level of the critical value, rejecting the original hypothesis of weak instrumental variables. Meanwhile, Kleibergen–Paap rk LM statistic is 39.211, 26.533 and 9.019, respectively, which corresponds to p-values of at least <0.05, rejecting the hypothesis of under-identification and proving the validity of instrumental variables.

TABLE 4. IECC accountants, issuance examination disclosure, and IPO market share.

	Marketshare	Marketshare	Marketshare
AuditorRelation	0.032***	0.027**	−0.018
AuditorRelation	(2.93)	(2.57)	(−0.70)
Post		0.006
Post		(0.39)
AuditorRelationPost*		−0.023**	0.029
AuditorRelationPost*		(−2.02)	(0.97)
Aud_reputation			−0.042**
Aud_reputation			(−1.97)
Aud_reputationPost*			0.023
Aud_reputationPost*			(1.04)
Aud_reputationAuditorRelation*			0.048*
Aud_reputationAuditorRelation*			(1.90)
Aud_reputationPostAuditorRelation			−0.061**
Aud_reputationPostAuditorRelation			(−1.97)
lnIPOincome	0.034***	0.035***	0.035***
lnIPOincome	(11.35)	(11.52)	(11.66)
lnIncome	−0.015***	−0.012***	−0.017***
lnIncome	(−3.92)	(−3.55)	(−3.83)
ModifiedOpinion	0.000	−0.000	0.000
ModifiedOpinion	(0.34)	(−0.25)	(0.27)
lnAge	−0.003	−0.003	−0.005**
lnAge	(−1.20)	(−1.46)	(−2.31)
lnCPAnum	0.027***	0.021***	0.019***
lnCPAnum	(4.29)	(3.75)	(3.59)
_cons	−0.218***	−0.214***	−0.102**
_cons	(−8.13)	(−8.26)	(−2.44)
Year Fes	Yes	Yes	Yes
N	253	253	253
R ²	0.621	0.656	0.674
Cragg–Donald Wald F statistic	40.835	65.575	31.270
Kleibergen–Paap rk LM statistic	39.211***	26.533***	9.019**

Note: The t-values reported in parentheses are based on robust standard errors and firm-level clustering (cluster); *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

4.3.2 Propensity score matching

To mitigate the estimation bias caused by sample selection, we further use IECC accounting firms as the control group and non-IECC accounting firms as the experimental group, and use propensity matching score (PSM) to screen from the initial control group to obtain a control sample with similar characteristics to the experimental group. The covariates used in the matching process specifically include IPO audit income (lnIPOincome), financial report audit income (lnIncome), non-standard unmodified audit opinion (ModifiedOpinion), year of establishment (lnAge), and number of CPAs (lnCPAnum). The matching is done using the logit model based on no-putback one-to-one nearest neighbour matching. Then, the matched samples are applied to a re-regression test of model (1). The regression results, shown in Table 5, show that the regression coefficient of Relation is 0.011 and significantly positive at the 10% level. Thus, the empirical results for Hypothesis 1 are robust.

TABLE 5. Regression results based on propensity score matching method.

	Marketshare
AuditorRelation	0.011*
AuditorRelation	(1.76)
lnIPOincome	0.039***
lnIPOincome	(9.60)
lnIncome	−0.018***
lnIncome	(−3.24)
ModifiedOpinion2	−0.000
ModifiedOpinion2	(−0.34)
lnAge	−0.003
lnAge	(−1.02)
lnCPAnum	0.034***
lnCPAnum	(3.91)
_cons	−0.229***
_cons	(−6.92)
Year Fes	Yes
Industry Fes
N	165
R ²	0.685

Note: The t-values reported in parentheses are based on robust standard errors and firm-level clustering (cluster); *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

4.3.3 Placebo test

Considering that the capital market system will become more and more sophisticated over time, the reason for the reduced market share of IECC accounting firms may not necessarily be the implementation of issuance disclosure in 2015 but could be due to other regulatory factors. In November 2018, at the opening ceremony of the first China International Import Expo (CIIE), the establishment of the STAR market in the Shanghai Stock Exchange and a pilot registration system was officially announced, signalling the launch of the registration system reform and a more comprehensive and transparent phase of securities regulation. In order to exclude the policy impact of the registration system reform, this study adopts a placebo test to change the policy point in the study (13 May 2015) to 1 January 2019. Table 6 reports the test results of the re-regressing model (2), and the regression coefficient of the interaction term AuditorRelation*Post is −0.001, which is not significant. Therefore, the regression results for Hypothesis 2 are robust.

TABLE 6. Regression results based on placebo tests.

	Marketshare
AuditorRelation	0.009
AuditorRelation	(1.51)
Post	−0.012
Post	(−0.72)
AuditorRelationPost*	−0.001
AuditorRelationPost*	(−0.08)
lnIPOincome	0.034***
lnIPOincome	(15.86)
lnIncome	−0.013***
lnIncome	(−3.06)
ModifiedOpinion	−0.000
ModifiedOpinion	(−0.15)
lnAge	−0.003
lnAge	(−0.87)
lnCPAnum	0.024***
lnCPAnum	(3.37)
_cons	−0.197***
_cons	(−7.84)
Year Fes	Yes
Industry Fes
N	253
R ²	0.653

Note: The t-values reported in parentheses are based on robust standard errors and firm-level clustering (cluster); *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

5 FURTHER RESEARCH

5.1 IECC accountants, disclosure of issuance examination, and the practice experience of signing CPAs

In the IPO auditing process, accounting firms assume the responsibility of providing reasonable assurance on the fairness of corporate financial information and expressing opinions on the fairness, legality, and consistency of relevant information and data. Accountants' industry expertise is directly related to the quality of information disclosed by IPO companies and, therefore, affects the quality of new share offerings. However, prior to the disclosure of the IPO examination and in the face of the potential excess returns and lower risks brought about by the IECC, accounting firms with the IECC may be reluctant to assign accountants with industry expertise to act as auditors for IPO companies.

After the implementation of the issuance examination disclosure system, the value of IECC social capital is significantly reduced, and the disclosure of high-quality information is key for an IPO company to successfully issue new shares in the securities market and go public for trading. In the face of the demand for high-quality accounting information disclosure in IPO examination, in order to gain more IPO market share in the competitive auditing market, accounting firms with IECC may be more inclined to assign accountants with industry experience to undertake the auditing business of IPO companies. Moreover, compared with high-reputation IECC accounting firms, low-reputation IECC accounting firms are more likely to assign accountants with industry expertise to undertake IPO audits.

Therefore, models (4)–(6) are all constructed with non-financial companies listed under the approval system of Shanghai and Shenzhen A-shares from 2009 to 2021 as the research object. We measure CPA practice experience (CPAIPOauditnum) by the cumulative number of IPO audit projects that the signing CPAs had participated in the year before the IPO companies went public. Asset size (Size), leverage ratio (Lev), firm growth (Growth), firm performance (ROA), major shareholders' equity (MSE), and underwriter reputation (Reputation) are used as control variables. The relationship between IECC accountants, disclosure of issuance examination, and practice experience of signing CPAs is verified in this manner:

{CPAIPOauditnum}_{i, t} = α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Controls}_{i, t} + ε_{i, t},

()

\begin{matrix} {CPAIPOauditnum}_{i, t} = α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Post}_{i, t} \\ + α_{3} {AuditorRelation}_{i, t} * {Post}_{i, t} + α_{4} {Controls}_{i, t} + ε_{i, t}, \end{matrix}

()

\begin{matrix} \begin{array}{l} {CPAIPOauditnum}_{i, t} = & α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Post}_{i, t} + α_{3} Aud_{reputation}_{i, t} + α_{4} {AuditorRelation}_{i, t}^{*} {Post}_{i, t} \\ + α_{5} Aud_{reputation}_{i, t}^{*} {Post}_{i, t} + α_{6} {AuditorRelation}_{i, t}^{*} Aud_{reputation}_{i, t} \\ + α_{7} {AuditorRelation}_{i, t}^{*} {Post}_{i, t}^{*} Aud_{reputation}_{i, t} + α_{8} {Controls}_{i, t} + ε_{i, t} \end{array} . \end{matrix}

()

Table 7 presents the results of the test of the relationship between IECC accountants, issuance examination disclosure, and CPA experience. As can be seen in column (1) of Table 7, there is a significant negative relationship between accountants' IECC and the practice experience of CPAs appointed by accounting firms. As seen in column (2) of Table 7, after the implementation of the issuance examination disclosure system, IECC accounting firms increasingly assign CPAs with a higher level of industry experience to handle IPO business. As seen in column (3) of Table 7, the industry experience of signing CPAs appointed by low reputation IECC accounting firms increases after the implementation of the issuance examination disclosure system.

TABLE 7. The relationship between IECC accountants, issuance examination disclosure, and the practice experience of signing CPAs.

	CPAIPOauditnum	CPAIPOauditnum	CPAIPOauditnum
AuditorRelation	−0.209***	−0.379***	−0.201***
AuditorRelation	(−3.62)	(−5.08)	(−6.86)
Post		−0.180**	−0.090
Post		(−2.67)	(−1.07)
AuditorRelationPost*		0.328***	0.150***
AuditorRelationPost*		(6.23)	(3.06)
Aud_reputation			−0.127**
Aud_reputation			(−2.56)
Aud_reputationPost*			−0.206***
Aud_reputationPost*			(−4.82)
Aud_reputationAuditorRelation*			−0.308**
Aud_reputationAuditorRelation*			(−2.84)
Aud_reputationPostAuditorRelation			0.310***
Aud_reputationPostAuditorRelation			(3.93)
Size	−0.259**	−0.257**	−0.278**
Size	(−2.90)	(−2.92)	(−2.94)
Lev	1.554**	1.538**	1.469**
Lev	(2.31)	(2.33)	(2.30)
Growth	−0.961**	−0.969**	−0.964**
Growth	(−2.17)	(−2.19)	(−2.27)
ROA	0.650**	0.647**	0.425
ROA	(2.33)	(2.44)	(1.75)
MSE	−0.313	−0.340	−0.450
MSE	(−0.33)	(−0.35)	(−0.53)
Reputation	0.476***	0.489***	0.495***
Reputation	(3.62)	(3.64)	(3.72)
_cons	6.442***	6.487***	7.101***
_cons	(4.43)	(4.49)	(4.39)
Year Fes	Yes	Yes	Yes
Industry Fes	Yes	Yes	Yes
N	2158	2158	2158
R ²	0.186	0.186	0.188

Note: The t-values reported in parentheses are based on robust standard errors and firm-level clustering (cluster); *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

5.2 The relationship between IECC accountants, issuance examination disclosure, and IPO audit fees

Before the disclosure of the issuance examination, accounting firms with IECC accountants had more social capital and the ability to help poor-quality IPO companies to go public successfully; thus, they could charge higher audit fees. After the implementation of the issuance examination disclosure system, the value of social capital of IECC accountants decreases significantly, and the disclosure of high-quality information becomes key to the successful listing of IPO companies; thus, accounting firms with IECC accountants are likely to select better-quality IPO companies and reduce their IPO audit fees. Moreover, in order to gain more market share in the competitive auditing market, IECC accountants with low reputations are likely to reduce their IPO audit fees compared to high-reputation IECC accountants.

To test the above mechanism, models (7)–(9) are constructed for all non-financial companies listed under the approval system of Shanghai and Shenzhen A-shares from 2009 to 2021. We measure CPAFee as the natural logarithm of the IPO audit fee of accounting firms. Asset size (Size), leverage ratio (Lev), firm growth (Growth), firm performance (ROA), major shareholders' equity (MSE), and underwriter reputation (Reputation) are used as control variables. The relationship between IECC accountants, disclosure of issuance examination, and IPO audit fees is verified in this manner:

{CPAFee}_{i, t} = α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Controls}_{i, t} + ε_{i, t},

()

{CPAFee}_{i, t} = α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Post}_{i, t} + α_{3} {AuditorRelation}_{i, t} * {Post}_{i, t} + α_{4} {Controls}_{i, t} + ε_{i, t},

()

\begin{matrix} \begin{array}{l} {CPAFee}_{i, t} = & α_{0} + α_{1} {AuditorRelation}_{i, t} + α_{2} {Post}_{i, t} + α_{3} Aud_{reputation}_{i, t} + α_{4} {AuditorRelation}_{i, t}^{*} {Post}_{i, t} \\ + α_{5} Aud_{reputation}_{i, t}^{*} {Post}_{i, t} + α_{6} {AuditorRelation}_{i, t}^{*} Aud_{reputation}_{i, t} \\ + α_{7} Aud_{reputation}_{i, t}^{*} {Post}_{i, t}^{*} {AuditorRelation}_{i, t} + α_{8} {Controls}_{i, t} + ε_{i, t} \end{array} . \end{matrix}

()

Table 8 presents the test results of the relationship between IECC accountants, issuance examination disclosure, and IPO audit fees. As shown in column (1) of Table 8, accounting firms with IECC charge higher IPO audit fees. As shown in column (2) of Table 8, the IPO audit fees of accounting firms with IECC are lower after the implementation of the issuance examination disclosure system. As can be seen from column (3) of Table 8, after the implementation of the issuance examination disclosure system, the IPO audit fees of IECC accounting firms with low reputations are lower compared to those with high reputations.

TABLE 8. The relationship between IECC accountants, issuance examination disclosure, and IPO audit fees.

	CPAFee	CPAFee	CPAFee
AuditorRelation	0.048***	0.095***	0.078**
AuditorRelation	(3.66)	(5.31)	(2.95)
Post		0.321***	0.302***
Post		(8.02)	(6.36)
AuditorRelationPost*		−0.065*	0.028
AuditorRelationPost*		(−2.15)	(0.58)
Aud_reputation			−0.083***
Aud_reputation			(−3.15)
Aud_reputationAuditorRelation*			0.025
Aud_reputationAuditorRelation*			(0.64)
AuditorRelationPost*			−0.019
AuditorRelationPost*			(−0.65)
Aud_reputationPostAuditorRelation			−0.110*
Aud_reputationPostAuditorRelation			(−2.04)
Size	0.154***	0.153***	0.149***
Size	(8.08)	(8.07)	(7.73)
Lev	0.232*	0.243*	0.232*
Lev	(2.08)	(2.08)	(2.02)
Growth	−0.066	−0.063	−0.062
Growth	(−1.31)	(−1.23)	(−1.22)
ROA	0.658***	0.666***	0.626***
ROA	(5.34)	(5.94)	(5.14)
MSE	1.189***	1.210***	1.181***
MSE	(3.71)	(3.78)	(3.57)
Reputation	−0.037***	−0.044***	−0.044***
Reputation	(−3.83)	(−4.59)	(−4.78)
_cons	2.156***	2.142***	2.306***
_cons	(6.17)	(6.16)	(6.46)
Year Fes	Yes	Yes	Yes
Industry Fes	Yes	Yes	Yes
N	2158	2158	2158
R ²	0.491	0.496	0.500

Note: The t-values reported in parentheses are based on robust standard errors and firm-level clustering (cluster); *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

6 CONCLUSIONS AND IMPLICATIONS

This study analyses and examines the impact of IPO issuance examination disclosure on accountants' IPO market share by taking accounting firms that had undertaken A-share approval system IPO audit projects from 2011 to 2021 as the research subjects. We demonstrate that IECC accounting firms had a higher IPO market share before the public disclosures on issuance examinations of IPOs, while the market share of IECC accounting firms decreased after the implementation of the issuance examination disclosure system. Further, the decrease in low-reputation IECC accounting firms is more significant. Further research also reveals that after the implementation of the issuance examination disclosure system, IECC accounting firms with low reputations charge lower audit fees and are more likely to assign industry-experienced accountants to undertake IPO audits. The study suggests that the disclosure system successfully restrains the behaviour of IEC members, improves regulatory efficiency, and reduces the social capital value of IECC accountants. IPO issuing companies prefer to appoint high-reputation accountants to undertake IPO auditing business, and the implementation of the issuance examination disclosure system has a greater negative impact on low-reputation accountants.

Although the IEC was abolished after the introduction of the registration system in China's securities market and a market-based IPO mechanism has been implemented, IPOs under the registration system are still subject to examination by the relevant authorities of the Exchange, and IPO companies are required to disclose information relating to the inquiry letters and response letters in a timely manner. The issuance examination disclosure system not only regulates the behaviour of the authorities during IPO examinations but also prevents IPO companies, intermediaries, and IEC members from “colluding” to harm the public interest. The registration system is a new share issuance system centred on information disclosure, and the quality of information disclosure is the key to improving the efficiency of IPO audits. Therefore, after the implementation of the registration system in China's securities market, the stock exchange should further strengthen the supervision of IPO audit inquiries and reply letters of IPO companies and improve the information disclosure system of IPO examination. Thus, the transparency of IPO audit information can be improved to prevent the “collusion” between the regulator and the regulated due to the opacity of information and to improve the efficiency of IPO examination. Furthermore, accounting firms, as the assurance agencies for accounting information disclosure, should effectively fulfil their fiduciary responsibilities to investors and carry out their responsibilities as the “gatekeepers” of new share issuance in the securities market, and build their reputation mechanisms by continuously improving the quality of their audit services so as to gain a greater share of the audit market.

ACKNOWLEDGEMENT

Open access publishing facilitated by University of Wollongong, as part of the Wiley - University of Wollongong agreement via the Council of Australian University Librarians.

Open Research

DATA AVAILABILITY STATEMENT

Research data are not shared.

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1 Since the establishment of China's stock market, the issuance of new shares has been subject to an examination system and an approval system, and it was not until 13 June 2019 that a pilot registration system was implemented on the STAR market and the full implementation of the registration system commenced on 17 February 2023.
2 According to the CSRC's selection criteria for IEC members, underwriters generally do not serve as members of the IEC because they are “sponsors” of IPO companies. During the sample period of this study, only the 17th IEC included four part-time members from securities firms, but none of these members were involved in the review of specific projects.

Volume64, Issue4

December 2024

Pages 4313-4332

Examination disclosure, issuance examination committee connections and accountants' IPO market share

Abstract

1 INTRODUCTION

2 THEORETICAL ANALYSIS AND HYPOTHESIS DEVELOPMENT

3 RESEARCH DESIGN

3.1 Sample selection

3.2 Model design and variable definitions

3.3 Focal variable

3.4 Explanatory variables

3.5 Control variables

4 EMPIRICAL RESULTS AND ANALYSIS

4.1 Descriptive statistics

4.2 Regression results and analysis

4.3 Robustness tests

4.3.1 Instrumental variables test (IVT)

4.3.2 Propensity score matching

4.3.3 Placebo test

5 FURTHER RESEARCH

5.1 IECC accountants, disclosure of issuance examination, and the practice experience of signing CPAs

5.2 The relationship between IECC accountants, issuance examination disclosure, and IPO audit fees

6 CONCLUSIONS AND IMPLICATIONS

ACKNOWLEDGEMENT

Open Research

DATA AVAILABILITY STATEMENT

REFERENCES

References

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Examination disclosure, issuance examination committee connections and accountants' IPO market share

Abstract

1 INTRODUCTION

2 THEORETICAL ANALYSIS AND HYPOTHESIS DEVELOPMENT

3 RESEARCH DESIGN

3.1 Sample selection

3.2 Model design and variable definitions

3.3 Focal variable

3.4 Explanatory variables

3.5 Control variables

4 EMPIRICAL RESULTS AND ANALYSIS

4.1 Descriptive statistics

4.2 Regression results and analysis

4.3 Robustness tests

4.3.1 Instrumental variables test (IVT)

4.3.2 Propensity score matching

4.3.3 Placebo test

5 FURTHER RESEARCH

5.1 IECC accountants, disclosure of issuance examination, and the practice experience of signing CPAs

5.2 The relationship between IECC accountants, issuance examination disclosure, and IPO audit fees

6 CONCLUSIONS AND IMPLICATIONS

ACKNOWLEDGEMENT

Open Research

DATA AVAILABILITY STATEMENT

REFERENCES

References

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