The unintended consequences of administrative monopoly regulation: Evidence from audit fees

Exploiting the implementation of China's Fair Competition Review System (FCRS) as a quasi-natural experiment, this study investigates the impact of administrative monopoly regulation on corporate audit fees based on Chinese A-share listed firms from 2009 to 2023. Our findings show that the FCRS significantly reduces audit fees for state-owned enterprises (SOEs) compared to private firms. The mechanism tests indicate that the FCRS primarily reduces audit fees by inhibiting corporate earnings management, lowering operational risk, and reducing control risk. The heterogeneity tests demonstrate that the effect of the FCRS on audit fees is shaped by both its institutional characteristics and the core determinants of audit fees. From the perspective of FCRS institutional characteristics, the reduction in audit fees is more pronounced in firms with heavier policy burdens, in industries with lower market competition, and in regions with stronger policy implementation intensity. From the perspective of audit fee determinants, the reduction in audit fees is more pronounced in firms with lower litigation risk, lower media attention, and lower financing costs. Further analysis confirms that the reduction in audit fees brought about by the FCRS does not compromise audit quality. This research contributes to the literature by filling the research gap on the impact of administrative monopoly regulation on corporate governance costs and offering policy insights regarding the FCRS.