Research Highlights

Hong Kong’s IPO market has achieved stellar results, ranking as the top global listing venue in recent years. This study takes advantage of the unique setting of Hong Kong to investigate whether the fee premium associated with abnormally high audit fees indicates compromised auditor independence or reflects additional, unobserved efforts that enhance audit quality. Based on a sample of Hong Kong IPOs, the study analyzes the association between abnormal audit fees and pre-IPO real activities manipulation (RAM). Our analysis reveals that Hong Kong auditors charging abnormally high fees are associated with reduced pre-IPO RAM, and that stronger investor protection regulations contribute to improved audit quality. Moreover, we find that a robust institutional environment can mitigate the effects of political influence on audit quality, which is particularly important for politically connected firms seeking cross-border listings. Overall, auditors who charge higher fees within a strong institutional environment, such as that of Hong Kong, provide superior IPO audit quality compared to their counterparts.