Non-executive employee stock ownership plan and auditor reporting conservatism: Evidence from China

There is not a consistent conclusion on whether non-executive employee stock ownership plan (ESOP) plays a positive role in corporate operation. Previous studies mainly investigate this question from an internal perspective within the firm by examining the economic consequences of non-executive ESOP. Our study intends to provide new evidence from the perspective of an important external party: the auditors. Using a sample of Chinese listed firms over the period of 2014-2021, we find that non-executive ESOP negatively affects auditor reporting conservatism. In other words, auditors are more likely to give clean opinions to firms with non-executive ESOP. This effect is more pronounced when more non-executive employees are involved, when managers have strong incentives to take risk in financial reporting, and for firms with higher degree of information asymmetry. We further find that the underlying mechanisms is that non-executive ESOP improves a firm’s financial reporting quality, presented as less earnings management, restatements and frauds, thus reducing audit risk.