The impact of capital market internationalization on auditors’ risk response behavior: an enterprise life cycle perspective

Purpose This paper aims to investigate the influence of the exogenous event of A-share inclusion in the Morgan Stanley Capital International (MSCI) index on auditors’ risk response behavior. Additionally, it explores variations in this impact across different stages of the enterprise life cycle. Design/methodology/approach This study treats the official incorporation of Chinese A-shares into the MSCI as a quasi-natural experiment. Using data from A-share listed companies from 2010 to 2020, it applies a double difference model to rigorously analyze the effect of capital market internationalization on auditor risk response behavior. Findings The results indicate that following capital market internationalization, auditors of listed companies exhibit reduced audit input and lower audit fees. This suppressive effect is primarily observed in the mature phase of the enterprise life cycle. Further analysis reveals that the influence of capital market internationalization is achieved mainly by easing financing constraints for listed companies and enhancing the optimism conveyed through management’s language. This effect is more pronounced among enterprises characterized by higher levels of management myopia and superior internal control quality. Economic consequence tests demonstrate that reducing auditors’ audit input and fees after A-share inclusion in the MSCI index contributes to decreasing enterprise risk-taking and the likelihood of senior management changes. Originality/value This study advances our understanding of the factors influencing auditor risk-taking behavior and clarifies the role and significance of capital market internationalization in corporate governance.