Abstract: From the perspective of the interaction between relationship contracts and institutional environment, this paper investigates the impact of the relationship-based transactions, the institutional environment and their interaction on the corporate demands for external auditing and corporate values. The results show that the enterprises depending more on relationship-based transactions would prefer to hire the small local audit firms for their auditing work, and the auditing fee is much lower; along with the improvement of the institutional environment, this kind of preference will be weakened. When we further control the endogenous issues, the conclusion of this study still remains to be true. This paper has further enriched the literatures on the demands for external auditing and auditing charges in the society of transition economy with relationship-based transactions as the major characteristics, it also contributes increment information to the understanding of the corporate governance effect and the transmission mechanism from external auditing.

Key words: relationship-based transaction; institutional environment; local small audit firms; audit fee