Regulatory Price Restrictions, Audit Fees and Audit Outcomes: Evidence From Audit Fee Regulation No. 196 in China

ABSTRACT This paper examines the effect of audit fee regulation on audit fees and audit outcomes. Leveraging the staggered introduction of audit fee restrictions in different Chinese provinces, we find that audit fee regulation is effective in curbing lowballing behaviours and improving audit quality. The increased audit independence and audit efforts are the main mechanisms. The relation between audit fee regulation and audit quality is more pronounced (1) when client firms have more external monitoring (2) when firms have pre‐regulation lowballing behaviours. Overall, our findings offer plausibly causal evidence that curbing low‐price competition in the audit market leads to improved audit outcomes.