Tax-Haven Investments and Auditor Choice: Evidence from China

Abstract We investigated the effect of direct investments in tax havens on firms’ auditor choices and found that because tax-haven investments intensify agency problems and information asymmetry, firms tend to hire high-quality auditors to address these issues, with this tendency being stronger in firms with weak internal-governance mechanisms or poor information environments. The economic consequences analysis revealed that while selecting high-quality auditors for tax-haven investments increases the likelihood of a nonstandard audit opinion, it significantly decreases the probability of regulatory violations and enhances firm value. Our study provides empirical evidence for firms’ auditor-choice behavior in the context of overseas investments.