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1. Introduction
In recent years, prior literature has given increasing attention to corporate political connections (e.g. Guedhami et al., 2014; Preuss and Königsgruber, 2021; Xu et al., 2019). Firms that have political connections (PCs) may have a better chance of receiving debt financing (e.g. Boubakri et al., 2012; Faccio, 2006), a lower loan cost (Houston et al., 2014), access to public funds (Goldman et al., 2013) and fewer penalties and enforcement (Liu et al., 2020) than firms without PCs. Contrary to this, some studies indicate that politically connected firms (PCFs) have low earnings quality, more earnings management activities and increased rent-seeking behavior (e.g. Chaney et al., 2011; Habib et al., 2017).
A number of recent studies have begun to investigate whether firms' PCs influence their choice of auditors and audit outcomes. One strand of the literature examines the influence of corporate PCs on auditor choice, but the evidence is ambiguous. For example, Guedhami et al. (2014) report that PCFs tend to hire high-quality auditors to boost their financial statements' integrity. In contrast, Cheng et al. (2015), Habib et al. (2017) and Harymawan (2020) find that PCs negatively affect high-quality auditor demand, suggesting that firms with PCs may hire non-Big 4 auditors as a means of protecting their political interests and concealing tunneling and rent-seeking activities.
Another strand of literature examines the effects of PCs on audit opinions with conflicting results. It has been shown that firms with PCs are more likely to receive favorable audit opinions as auditors consider PCFs to have a lower litigation risk and, therefore, a lower audit risk (e.g. Habib et al., 2018; Hu et al., 2017; Liu and Subramaniam, 2013). The study by Hu et al. (2017), for example, finds that politically connected chief executive officers (CEOs) are positively associated with favorable audit opinions in Chinese firms during the subsequent period and this relationship is stronger when the CEO is affiliated with a local government. However, firms with PCs may experience an agency problem and may issue financial misstatements, which can increase audit risk and could result in an unfavorable audit opinion (Gul, 2006).
Given these mixed results, firms' PCs and their impact on auditor selection...