Date of Award


Degree Type


Degree Name

Master of Philosophy (MPHIL)



First Advisor

Prof. Phyllis MO

Second Advisor

Prof. Chan Koon-Hung


Debt as opposed to equity as the major source of financing and the influence of banks on the corporate governance of listed companies are unique features of the Japanese business environment. This thesis investigates how these features affect the choice of auditor by Japanese listed companies and auditor reporting by Japanese CPA firms on those companies. Pong and Kita (2006) provided some univariate analyses and indicated that Japanese companies tended to select the same external auditors as their main banks to reduce the agency costs. In this thesis, I further examine the influence of main banks on auditor selection by logistic regression and also investigate the influence of main banks on auditor reporting quality after controlling self-selection bias. Using data from Japanese listed companies in the Tokyo Stock Exchange over the 2002-2008 period, I provide empirical evidence that companies with more reliance on main bank loans are more likely to choose their main banks’ external auditors. Using the Propensity Score Matching method and the Heckman two-step binary probit model to control for self-selection bias, the empirical results support the hypothesis that main bank auditors are more likely to issue modified opinions to the borrowing companies than non-main bank auditors, providing evidence of higher audit quality from main bank auditors. As a sensitivity test, I also use discretionary accruals as a measure of audit quality. the results indicate that companies who choose the same auditors as their main banks have higher audit quality than companies who choose different auditors from their main banks. My thesis contributes to the existing auditing literature in several ways. First, by studying the influence of debt financing on auditor choice and auditor reporting, this thesis extends the auditor market research that focuses mainly on the role of auditors in equity markets to the bank-based market. Furthermore, this thesis also complements auditing research on the influence of institutions on audit quality.

Recommended Citation

Jiang, J. (2010). The influence of banks on auditor choice and auditor reporting in Japan (Master's thesis, Lingnan University, Hong Kong). Retrieved from

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Accounting Commons