How do abnormal audit fees, investor protection and political influence across jurisdictions affect IPO audit quality? Evidence from Hong Kong

Purpose This paper aims to utilize the unique setting of Hong Kong to investigate whether the fee premium associated with abnormally high audit fees indicates compromised auditor independence or reflects additional, unobserved efforts that enhance audit quality. Design/methodology/approach Based on a sample of Hong Kong initial public offerings (IPOs) from 2009 to 2019, the study analyzes the association between abnormal audit fees and pre-IPO real activities manipulation (RAM). Findings The analysis reveals that auditors charging abnormally high fees are associated with reduced pre-IPO RAM, and that stronger investor protection regulations contribute to improved audit quality. Moreover, this study finds that a robust institutional environment can mitigate the effects of political influence on audit quality, which is particularly important for politically connected firms seeking cross-border listings. Originality/value Overall, auditors who charge higher fees within a strong institutional context provide superior IPO audit quality compared to their counterparts.