Institutional environment and qualified foreign institutional investors' trust in auditing

Even though corporate governance is a channel for qualified foreign institutional investors (QFIIs) to mitigate information asymmetry and is essential in substituting for poor institutional quality in the host countries of QFIIs, systematic evidence is scanty due to the challenge of capturing institutional quality changes in the host country. Thus, this study examines how improvements in country-level institutional quality affect QFIIs' trust in a firm's audit quality. Using a propensity score matching method, we found that after the 2013 anti-corruption reform improved the institutional quality level in China, Chinese firms without an audit committee experienced a sharp increase in QFII ownership relative to their peers. This finding is more pronounced in regions where the government exerted more effort in combating corruption. Our findings provide supporting evidence that the improvement in institutional quality increases QFIIs' trust in the audit quality, thereby decreasing their reliance on the audit committee as an internal corporate governance mechanism.