Earnings persistence, institutional investors monitoring and types of political connections

2020 ◽  
Vol 28 (3) ◽  
pp. 309-327
Author(s):  
Chwee Ming Tee ◽  
Puspavathy Rasiah
Keyword(s):  
Institutional Investors ◽  
Earnings Quality ◽  
Political Connections ◽  
Earnings Persistence ◽  
Ceo Power ◽  
Content Type ◽  
Audit Firm ◽  
Political Ties ◽  
Different Types ◽  
Big Four

PurposeThe purpose of this study is to examine whether institutional investors monitoring attenuate (exacerbate) weaker earnings persistence in politically connected firms (PCFs). In addition, it investigates whether earnings persistence do vary according to different types of political connections.Design/methodology/approachThis study employs earnings persistence as measure of earnings quality and ordinary least squares (OLS) model to examine: (1) the moderating effect of institutional investors’ ownership on the association between earnings persistence and PCFs and (2) the association between different types of political connections and earnings persistence.FindingsThis study finds that institutional investors' ownership attenuates weaker earnings quality in PCFs, indicating effective monitoring. However, stronger earnings persistence is associated with PCFs with longer political ties, audited by big four audit firm and with higher CEO power.Originality/valueThis study reveals the lower earnings persistence in PCFs can be attenuated by institutional investors monitoring. However, findings also suggest that earnings persistence in PCFs is affected by duration of political ties, big four audit firm and CEO power. This suggests that PCFs should not be viewed as a homogeneous group of firms.

Do audit opinions reflect earnings persistence?

2015 ◽  
Vol 30 (3) ◽  
pp. 244-276 ◽  
Author(s):  
Thanyaluk Vichitsarawong ◽  
Sompong Pornupatham
Keyword(s):  
Content Analysis ◽  
Earnings Quality ◽  
Decomposition Analysis ◽  
Earnings Persistence ◽  
Content Type ◽  
Audit Opinion ◽  
Going Concern ◽  
Reputation Risk ◽  
Different Types ◽  
Audit Opinions

Purpose – The purpose of this paper is to examine the association between audit opinion and earnings persistence of listed companies in Thailand from 2004 to 2008. Design/methodology/approach – We use archival data and hand collected data in regression analysis. Content analysis was used to perform decomposition analysis of audit modifications. Findings – Firms receiving modified opinions have lower earnings persistence than firms receiving unqualified opinions, and the degree of earnings persistence varies among types of modifications. We find that firms with a qualified opinion or a disclaimer have lower earnings persistence than firms receiving an unqualified opinion with an emphasis of matter (UEM). However, we find no difference in earnings persistence between firms receiving a qualification and a disclaimer. Content analysis reveals that there is information in certain types of modified opinions with respect to earnings quality. Firms receiving a scope limitation qualification and a going concern disclaimer have lower earnings persistence than firms receiving an UEM due to going concern issues. Research limitations/implications – Audit modifications reflect different degrees of problematic issues in clients’ firms, resulting in different impacts on earnings persistence. Thus, policymakers and regulators should emphasize the importance of using auditors’ reports. Strengthened enforcement by regulators makes individual auditors more aware of reputation risk and more likely to express appropriate audit opinions. Originality/value – We examine a broader set of modified audit opinions than those used in prior research. Our study offers the opportunity to examine the association between earnings persistence and different types of modified opinions, especially a disclaimer, which has been rarely found in prior research.

The effect of board and audit committee effectiveness on internal control disclosure under different regulatory environments in South Asia

2019 ◽  
Vol 17 (2) ◽  
pp. 170-200 ◽  
Author(s):  
Khurram Ashfaq ◽  
Zhang Rui
Keyword(s):  
South Asia ◽  
Internal Control ◽  
Audit Committee ◽  
Stock Exchange ◽  
Univariate Analysis ◽  
External Control ◽  
Content Type ◽  
Audit Firm ◽  
Big Four ◽  
Comply Or Explain

Purpose The purpose of this paper is to investigate the internal control disclosure (ICDISC) practices in South Asia and compare those disclosure practices across enforced setting (India) versus comply or explain setting (Pakistan and Bangladesh). Further, whether the audit firm size moderates the relationship between ICDISC practices and board & audit committee effectiveness. Design/methodology/approach To achieve these objectives, a sample of 100 non-financial companies was selected from Pakistan and India for three years’ period (2013-2015), whereas 93 companies were selected from Bangladesh based on market capitalization. The ICDISC index has been used which is based on the COSO framework. Findings Results of univariate analysis show that public sector companies in South Asia tend to disclose significantly more internal control information as compared to private sector companies. In terms of enforcement variable, the results of Mann–Whitney test show that companies listed in enforced setting have disclosed significantly greater extent of overall as well as individual categories of ICDISC as compared to companies listed in comply or explain setting. Based on multivariate analysis results for overall sample, it was found that board and audit committee characteristics and ownership by government have positive significant effect on ICDISC except representation of female or foreigner on audit committee which was found negatively significant. In addition to this, listing on foreign stock exchange and enforcement effect emerged as significant variables to influence ICDISC. Finally, the results of additional analysis state that the role of board and audit committee for influencing ICDISC has been moderated by the external auditor size in South Asia. In addition, enforcement variable is highly positively significant for companies having non-big four audit firm. Research limitations/implications These results imply that enforcement variable acts as an important alternative external control mechanism when companies do not have big four audit firm as their external auditors. Originality/value This is very first study on ICDISC in South Asia which explores the effect of enforcement and governance on ICDISC practices of firms. It also contributes toward the literature that the regulation on reporting of internal control can be effective in developing country only if there is strong penalty for non-compliance by regulatory authorities.

Institutional investors’ investment preference and monitoring: evidence from Malaysia

2019 ◽  
Vol 45 (9) ◽  
pp. 1327-1346
Author(s):  
Chwee Ming Tee
Keyword(s):  
Firm Performance ◽  
Institutional Investors ◽  
Capital Expenditure ◽  
Emerging Market ◽  
Firm Valuation ◽  
Profit Margin ◽  
Institutional Setting ◽  
Content Type ◽  
Net Profit ◽  
Different Types

Purpose The purpose of this paper is to examine the investment preference of various types of institutional investors in Malaysia, and its influence on firm valuation, operating performance and capital expenditure. Design/methodology/approach This study employs ordinary least squares model to examine: investment preference according to different types of institutional investors; the association between various types of institutional investors and firm valuation; the association between various types of institutional investors and firm performance; and the association between various types of institutional investors and capital expenditure. Findings The result shows that different types of institutional investors exhibit different investment preference. From the domiciles perspective, local institutional investors (LII) are found to be associated with higher Tobin’s Q, ROA and net profit margin. When viewed from business relationship perspective, “pressure-resistant” institutional investors (PRII) are positively associated with Tobin’s Q, ROA and net profit margin. Both LII and PRII are also associated with higher capital expenditure. Originality/value This study reveals the investment preferences of various types of institutional investors in an emerging market economy. The results show that institutional monitoring is associated with higher firm valuation, higher firm performance and higher capital expenditure. However, the effect is largely driven by local and PRII, particularly government-controlled institutional funds. These evidence suggest that different firm outcomes between emerging and advanced economy can be explained by variation in institutional setting.

scholarly journals Political ties and corporate performance: why efficiency matters?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rabia Najaf ◽  
Khakan Najaf
Keyword(s):  
Political Theory ◽  
Design Methodology ◽  
Corporate Performance ◽  
Political Connections ◽  
Stewardship Theory ◽  
Content Type ◽  
Political Ties ◽  
And Performance ◽  
Practical Implications

PurposeThe purpose of this paper is to examine and explain the complex interrelationships which influence the performance of politically connected firms to create value for their providers of finance and other stakeholders. In doing so, it examines the interrelationships between efficiency and delivering on corporate performance of a firm with political ties.Design/methodology/approachThe authors gathered the literature from the Scopus website. They reviewed the literature of 58 manuscripts about the efficiency and performance of politically connected firms.FindingsThe research finds that the better quality of efficiency of politically connected firms is positively related to the corporate performance of politically connected firms. The authors’ theoretical findings corroborate the political theory, agency theory, stakeholder theory, resource dependency theory and stewardship theory. These theories prove that political connections have an impact on firm performance as a politician reinforces the efficacy. To better understand the effect of political connections on solid performance due to efficiency, this study classifies various efficiencies and links them with political ties.Research limitations/implicationsSeveral avenues of research are suggested to examine further the interrelationships identified.Practical implicationsThe authors’ conceptual findings are valuable for institutional investors, policymakers and stakeholders. To sum up, all theoretical shreds of evidence prove that politically connected firms can enhance performance via efficiency.Originality/valueThe paper conceptualizes the efficiency and performance interrelationships of politically connected firms. The extant literature comparison allows an assessment of the extent to which different efficiency contexts lead to differences in performance.

Institutional Investors’ Monitoring and Stock Price Crash Risk: Evidence from Politically Connected Firms

2018 ◽  
Vol 21 (04) ◽  
pp. 1850028 ◽  
Author(s):  
Chwee Ming Tee ◽  
Angelina Seow Voon Yee ◽  
Aik Lee Chong
Keyword(s):  
Institutional Investors ◽  
Stock Price ◽  
Positive Association ◽  
Institutional Ownership ◽  
Political Connections ◽  
Crash Risk ◽  
Different Types

Motivated by recent studies on political connections and stock price crash risk, this study investigates whether there is an association between politically connected (POLCON) firms and stock price crash risk. Further, we examine whether institutional investors’ ownership can moderate this association. Using a dataset of Malaysian firms for the period 2002–2012, we show that POLCON firms are associated with higher risk of stock price crashes. However, the positive association between POLCON and stock crashes is attenuated by higher institutional ownership, implying effective monitoring. Finally, we find that only local institutional investors can significantly mitigate the positive association between POLCON firms and stock price crash risk. This suggests that different types of institutional investors can produce different monitoring outcomes in POLCON firms.

scholarly journals Political connections and earnings quality

2016 ◽  
Vol 24 (4) ◽  
pp. 339-356 ◽  
Author(s):  
Iman Harymawan ◽  
John Nowland
Keyword(s):  
Design Methodology ◽  
Stock Exchange ◽  
Earnings Quality ◽  
Political Stability ◽  
Political Connections ◽  
Content Type ◽  
Government Effectiveness ◽  
Different Dimensions ◽  
Market Pressures

Purpose The purpose of this study is to investigate how the earnings quality of politically connected firms is affected by changes in political stability and government effectiveness in a developing country. Design/methodology/approach This study uses a sample of 2,073 firm-year observations from 349 firms listed on the Indonesian Stock Exchange from 2003 to 2012 to examine how political stability and government effectiveness affect the earnings quality of politically connected firms, relative to non-politically connected firms. A two-stage model is used to address self-selection issues in the choice of firms to establish political connections. Findings This study finds that increased government effectiveness reduces the benefits of political connections, requiring politically connected firms to be more responsive to market pressures and resulting in higher earnings quality. However, increased political stability enhances the certainty of benefits from political connections, reducing the need for politically connected firms to respond to market pressures and resulting in lower earnings quality. Research limitations/implications For policymakers, these results indicate that different dimensions of political and economic development can affect the incentives of firms with political connections in different ways. Originality/value This study finds that the earnings quality of politically connected firms increases as government effectiveness improves, but it decreases as the political environment becomes more stable.

CEO career horizons and earnings quality in family firms

2020 ◽  
Vol 28 (2) ◽  
pp. 153-172
Author(s):  
Ayoib B. Che-Ahmad ◽  
Salau Olarinoye Abdulmalik ◽  
Nor Zalina Mohamad Yusof
Keyword(s):  
Agency Theory ◽  
Family Firms ◽  
Earnings Quality ◽  
Negative Relationship ◽  
Related Result ◽  
Chief Executive ◽  
Earnings Persistence ◽  
Method Of Moment ◽  
Content Type ◽  
Earnings Predictability

PurposeThe present study examines the effect of the chief executive officer (CEO) career horizon (CH) problem on earnings quality (ERN) for selected family-controlled firms known to have a unique operational goal.Design/methodology/approachThe generalised method of moment linear regression model was used on a sample of family-controlled firms in Malaysia from 2005 to 2016.FindingsThe study found a negative relationship between CH and ERN, measured by earnings persistence and earnings predictability. However, in the earnings predictability model, the reverse was found to be the case after interacting CH with CEO family affiliation, CEO experience and CEO equity. However, the use of a reputable auditor could not mitigate the CH problem. Also, the study obtained a closely related result in the earnings persistence model. The result aligns with the socio-emotional wealth (SEW) theory, which states that the goals of family-controlled firms go beyond financial objectives to include other non-financial objectives, and hence, their commitment to perpetuating their dynasty encourages them to preserve the quality of their earnings.Originality/valueExisting studies on family firms and ERN have treated family firms as homogeneous entities by comparing family and non-family firms, using the underlying theoretical justification of the agency theory. However, this study departs from the agency theory, by considering those factors (i.e. the extent of CEO alignment with family owners and the choice of auditor), using the SEW theory, which establishes the differences among family firms. This work builds on that of Chen et al., (2018) and Ali and Zhang (2015), which suggested that corporate governance can mitigate the CH problem. Therefore, the strength of a CEO's attachment to the family firm (measured by CEO equity ownership and CEO affiliation to family members in family firms) and the choice of the auditor can explain the variation in the effect of the CH problem in family firms.

Changes in ownership forms and role of institutional investors in governing public companies in Malaysia

2015 ◽  
Vol 11 (4) ◽  
pp. 455-475 ◽  
Author(s):  
Hairul Azlan Annuar
Keyword(s):  
Corporate Governance ◽  
Institutional Investors ◽  
Institutional Investor ◽  
Governance System ◽  
Public Companies ◽  
Content Type ◽  
Investment Companies ◽  
Corporate Governance System ◽  
Different Types

Purpose – The purpose of this paper is to ascertain whether different types of institutional investor in Malaysia are involved in the corporate governance of their investee companies, and, if yes, to what extent is the level of the involvement. Design/methodology/approach – A qualitative approach, consisting of a series of interviews with 18 senior investment managers of different types of institutional investor, was chosen. Findings – The findings suggest that lessons learnt from the fallout of the Asian crisis has made Malaysian institutional investors not only to be more prudent in managing their total funds and in making equities investment decisions, but has resulted in a more active participation in their “core” investee companies apart from merely discharging their voting rights. Interview analysis revealed that government-linked investment companies are championing the cause and could possibly affect the overall level of institutional investors’ involvement, which bode well for the future of the corporate governance system of the country. Research limitations/implications – Generalisations may be an issue when interviews are used as the method of inquiry. Also, the sample is not random, as access to many managers depended on recommendations. In addition, respondents were consciously selected to obtain different types of institutional investors that included government and non-government linked. Originality/value – There is a lack of work on studying the involvement of institutional investors in developing countries, whereby previous work and literature review were predominantly based upon the experience of Western economies.

Powerful CEOs and earnings quality

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shin-Rong Shiah-Hou
Keyword(s):  
Earnings Quality ◽  
Composite Index ◽  
Information Environment ◽  
Ceo Power ◽  
Structural Power ◽  
Content Type ◽  
Earnings Response Coefficient ◽  
Expert Power ◽  
Earnings Response ◽  
Ceo Characteristics

PurposeThis study explores the effect of CEO power on earnings quality. If powerful CEOs make the information environment more opaque, they can easily conceal information to hide self-dealing behavior through earnings manipulation. Conversely, if powerful CEOs who are well-protected create a transparent information environment, they will provide better quality earnings.Design/methodology/approachThe author constructs a composite index for CEO power by combining seven CEO characteristics and employs two variables including discretionary accruals and earnings response coefficient as proxies for earnings quality.FindingsThe author’s main results show a significant negative relation between CEO power and the firm's earnings quality. In addition, CEOs with stronger structural power and expert power are more likely to generate lower earnings quality, while those with stronger ownership power are more likely to provide higher earnings quality.Originality/valueThe findings suggest that CEO power reduces the firm's earnings quality because CEOs with structural power or expert power may destroy governance monitoring mechanisms.

Private equity in 401(K) plans – a trillion dollar opportunity?

2020 ◽  
Vol 21 (2/3) ◽  
pp. 85-91
Author(s):  
Robert L. Sichel ◽  
William P. Wade ◽  
Ruth E. Delaney ◽  
Kristina M. Zanotti ◽  
Michael McGrath
Keyword(s):  
Asset Allocation ◽  
Asset Management ◽  
Institutional Investors ◽  
Private Equity ◽  
Direct Access ◽  
Content Type ◽  
Regulatory Guidance ◽  
Private Market ◽  
Different Types ◽  
Asset Managers

Purpose To explain recent regulatory guidance for different types of stakeholders, including asset managers, fund complexes, and institutional investors. Design/methodology/approach Summary of recent regulatory guidance and explanation for different types of stakeholders, including asset managers, fund complexes, and institutional investors. Findings While the U.S. Department of Labor’s (DOL’s) letter does not open the door to direct access to Private Market Investments by 401(k) plan participants, it does provide a framework for the expanded use of private equity and, we believe, other types of Private Market Investments in managed asset allocation funds such as target date funds. Originality/value Practical guidance from experienced asset management and investment funds and ERISA lawyers.

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