Positive spillover effect and audit quality: a study of cancelling China’s dual audit system

The mandatory dual-audit and dual-reporting system (DADRS) for mainland Chinese firms cross-listed in Hong Kong (AH firms) was abolished in 2010. This study quantifies a positive spillover effect from Hong Kong-based auditors in the DADRS and examines whether and to what extent this affects the audit quality of AH firms. We find that AH firms exposed to a stronger positive spillover effect have higher audit quality, and the loss of this effect drives the declining audit quality of AH firms after they cancelled the DADRS. This study is among the first empirical works on this research topic.