The emergence of second-tier auditors in China: analysis of audit fee premium and audit quality

Strong government support for the growth of domestic audit firms has contributed to the emergence of second-tier auditors as an alternative to the Big 4 for Chinese listed companies in the post-2007 period. This paper examines audit fee and audit quality differences across the Big 4, second-tier auditors, and other small auditors. Controlling for auditor choice bias, we find the Big 4 earn a fee premium relative to second-tier auditors, although the audit quality between them is indistinguishable. Relative to other small auditors, however, second-tier auditors earn a fee premium that is accompanied by superior audit quality.