The double-edged sword of corporate financial asset allocation: evidence from audit pricing in China

Based on the theoretical perspectives of the ‘reservoir effect’ and the ‘crowding-out effect,’ this study examined the impact of corporate financial asset allocation (FAA) on audit fees and explores the underlying mechanisms. Addressing the limited understanding of how corporate financialization affects auditor risk assessment, we employ panel data of Chinese listed firms and identify a U-shaped relationship between FAA and audit fees. Specifically, when FAA is relatively low, the reservoir effect dominated, mitigating client risk and reducing audit fees. However, once FAA surpassed a critical threshold, the crowding-out effect prevails, heightening information opacity and audit risk, which leads to an increase in audit fees. This nonlinear association remains robust after a series of sensitivity analyses. Mechanism analyses show that financing constraints serve as a key transmission channel, while heterogeneity analyses reveal that ownership concentration and property rights positively moderate this relationship. Overall, the findings highlighted the ‘double-edged sword’ nature of FAA in shaping audit pricing, enrich the literature by revealing a new pathway through which FAA influences auditor risk perception, and offer important implications for audit pricing decisions and risk control in emerging markets.