Business Environment Optimization and Audit Quality in the STAR Market: Inverted U-Shaped Nonlinear Effect and ESG Risk Moderation Mechanism
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Abstract
The business environment constitutes a fundamental institutional arrangement shaping the behavioral incentives of capital market participants. However, whether its relationship with audit quality follows a monotonic linear pattern or exhibits more complex nonlinear dynamics remains an open empirical question. Using a sample of 4,502 firm-year observations from the STAR Market and ChiNext Board during 2020–2024, this paper employs the modified Jones model to measure audit quality and constructs a comprehensive provincial business environment index encompassing four dimensions — government efficiency, legal environment, financial development, and market maturity — using the entropy-weight method. Through individual fixed-effects panel models, we systematically examine the impact of business environment on audit quality. The findings reveal three key insights. First, a significant inverted U-shaped nonlinear relationship exists between business environment and audit quality, with an inflection point at approximately 0.544. Second, ESG disclosure serves as a risk-moderating barrier rather than a mediating channel. Third, significant heterogeneity is observed across regions, industries, and firm life-cycle stages. This paper breaks the conventional assumption of a linear institutional-audit quality relationship and provides new empirical evidence and policy implications for audit regulation under the registration-based IPO system.
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