Abstract: Agency conflict between management and shareholders is one of the most important issues in the realm of corporate governance, while auditing is viewed as one of the mechanisms to alleviate information asymmetry and reduce agency costs. But there is no literature to provide systematic empirical envidence though it is quoted frequently. By making use of the unique institutional background of China’s capital market and hand-collected data of public listed firms’ voluntary semi-annual audit from 2002 to 2009, this paper empirically investigates the argument whether and how voluntary semi-annual audit can reduce agency costs. The results consistently show that voluntary semi-annual audit does significantly reduce agency costs between management and shareholders, revealing the information value and corporate governance function of audit, regardless of the methods of Heckman two-stage model, OLS model, matched sample study or firm-level fixed effects regression. Moreover, there is no systematic difference between choosing BIG4 or non-BIG4 in reducing agency costs, indicating that what matters more to shareholders is the presence of voluntary audit rather than the choice of the auditors.

Key words: semi-annual report; voluntary audit; agency costs; self-selection