Auditor tenure and audit quality: an investigation of moderating factors prior to the commencement of mandatory rotations in India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nemiraja Jadiyappa ◽  
L. Emily Hickman ◽  
Ram Kumar Kakani ◽  
Qambar Abidi
Keyword(s):  
Audit Quality ◽  
Chief Executive ◽  
Business Group ◽  
Group Affiliation ◽  
Content Type ◽  
Conditioning Factors ◽  
Auditor Tenure ◽  
Moderating Factors ◽  
Business Group Affiliation ◽  
The Relationship

Purpose The Indian Companies Act 2013 mandated auditor rotations in the financial year 2018–2019. Similar regulations are being considered in many countries, based on the assumption that longer tenure is detrimental to audit quality; yet, the evidence from investigations of this assumption is inconclusive. This paper aims to examine the effect of moderating factors on the relation between audit quality and audit tenure, given the regulatory trend and the lack of consensus in extant literature. Design/methodology/approach This paper examines the relationship between audit quality and audit tenure among Indian firms from 2001 to 2015 and tests for moderating factors including auditor compensation, business group affiliation and chief executive officer (CEO) duality. Findings Contrary to the objective of mandatory rotations, this study finds that longer auditor tenure generally enhanced audit quality among Indian firms prior to mandatory rotations. However, for companies paying abnormally high compensation to auditors, this paper finds that longer tenure decreases audit quality, particularly if the firm is affiliated with a business group or firms where the CEO also serves as the board chair. Thus, the potential benefits of mandated shorter tenure appear to be confined to high-fee paying companies with a business group affiliation and/or a dual-role CEO. Originality/value This study is one of the first to examine conditioning factors that affect the relationship between audit quality and auditor tenure. Results suggest that regulations limiting auditor tenure would be beneficial only to the shareholders of a narrow group of firms; while for the majority of firms, limiting auditor tenure may actually be counter-productive.

Corporate social responsibility, business group affiliation and shareholder wealth: evidence from an emerging market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Eswaran Velayutham ◽  
Vijayakumaran Ratnam
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Emerging Market ◽  
Business Group ◽  
Shareholder Wealth ◽  
Group Affiliation ◽  
Content Type ◽  
Business Group Affiliation ◽  
Corporate Social ◽  
The Relationship

Purpose This paper aims to examine the relationship between corporate social responsibility (CSR) and shareholder wealth arising from announcement returns of security issuance from a frontier market. It also explores the role of business group affiliation (BGA) on this relationship. Design/methodology/approach The study uses short-term scenarios to examine the link between CSR and shareholder wealth using the event study methodology which helps us mitigate the reverse causality problems related to studies of the relationship between CSR and firm value. Abnormal returns surrounding the security issue announcements were generated using the market model. Findings This paper finds that security issuers with high CSR scores are associated with higher shareholder value. However, this paper finds that CSR activities of security issuers with BGA are value-destroying which is consistent with the agency perspective of CSR. Research limitations/implications This study is limited to only one nascent market, namely the Colombo Stock Exchange. Originality/value This study documents that CSR and BGA are important determinants, among others, of stock price reactions to security offerings in emerging markets.

Business group affiliation, earnings management and audit quality: evidence from Bangladesh

2017 ◽  
Vol 32 (4/5) ◽  
pp. 427-444 ◽  
Author(s):  
Mohammad Badrul Muttakin ◽  
Arifur Khan ◽  
Dessalegn Getie Mihret
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Earnings Quality ◽  
Investor Protection ◽  
Discretionary Accruals ◽  
Business Group ◽  
Group Affiliation ◽  
Content Type ◽  
Controlling Shareholders ◽  
Business Group Affiliation

Purpose This study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian emerging economy of Bangladesh. Design/methodology/approach A usable sample of 917 firm-year observations was drawn from companies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reports of sample companies. Earnings management was measured using the absolute value of discretionary accruals, and two proxies were used to measure audit quality: auditor size and industry specialisation. Findings Results showed that the level of discretionary accruals is positively associated with business group affiliation status, and higher audit quality reduces this association. This suggests that in environments without strong investor protection, complex ownership structures create opportunities for controlling shareholders to expropriate minority shareholders. The controlling shareholders could then mask this practice through earnings management. The findings also show that in environments lacking strong investor protection, audit quality can help improve earnings quality for group-affiliated firms. Practical implications The results suggest that financial statement users need to consider audit quality for a reasonable evaluation of the earnings quality of business groups. The study also informs regulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock market efficiency through improved earnings quality in environments where business group affiliation is prevalent. Originality/value This study documents empirical evidence on the moderating effect of audit quality on the positive association between business group affiliation and earnings management.

Corporate governance, firm performance, and business group affiliation: evidence from India

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Neeti Khetarpal Sanan ◽  
Dinesh Jaisinghani ◽  
Sangeeta Yadav
Keyword(s):  
Corporate Governance ◽  
Firm Performance ◽  
Empirical Evidence ◽  
Emerging Economies ◽  
Chief Executive ◽  
Business Group ◽  
Independent Directors ◽  
Group Affiliation ◽  
Content Type ◽  
Business Group Affiliation

Purpose The purpose of this paper is to investigate whether, in emerging economies, the relationship between a firm’s corporate governance (CG) and its performance is associated with firm’s affiliation to a business group. Design/methodology/approach A total of 209 publicly listed firms in India during a 10-year period from 2007 to 2016 were studied, and the random effects model was employed for analysis. Findings Empirical evidence showed that board size and institutional shareholding positively impacted firm performance, whereas the proportion of independent directors negatively impacted performance. In group-affiliated firms in emerging economies, chief executive officer duality negatively impacted, whereas institutional shareholding positively impacted performance. These results are consistent with the principal–principal agency theory. The study found no discernible impact of proportion of independent directors on firm performance in group-affiliated firms. Originality/value In analyzing the governance–performance relationship and its association with business groups, this study extends current understanding by connecting business group research in emerging economies with CG and firm performance research. In examining firms from several industries over a long period of time after controlling for firm size, capital structure and spends on research and development and marketing, the results of this study offer rich empirical evidence that contributes to the extant literature on the nature of the governance–performance relationship.

Auditor tenure and accounting conservatism: evidence from Greece

2016 ◽  
Vol 31 (6/7) ◽  
pp. 538-565 ◽  
Author(s):  
Laura K. Rickett ◽  
Anastasia Maggina ◽  
Pervaiz Alam
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Negative Impact ◽  
Accounting Conservatism ◽  
Accounting Quality ◽  
Cross Sectional ◽  
Content Type ◽  
Auditor Rotation ◽  
Auditor Tenure ◽  
The Relationship

Purpose This study aims to examine the relationship between auditor tenure and conservatism for firms in Greece. Greece not only has a high incidence of earnings management but is also required under the new European Commission (EC) regulation to comply with mandatory auditor rotation. Therefore, Greece is an ideal setting in which to study the association between auditor tenure and accounting conservatism. Design/methodology/approach Similar to Jenkins and Velury (2008), this paper uses Basu’s (1997) asymmetrical timeliness of earnings as a measure of conservatism. Following Li (2010), the regression is re-estimated for subsamples based on client importance as measured by the ranking of client sales among all clients audited by the firm. Findings In contrast to Li (2010), the results of this study, which used a sample of firms in Greece, indicate that conservatism decreases as the auditor–client relationship lengthens. Client importance does not appear to affect the relationship between auditor tenure and conservatism, as measured by asymmetric timeliness of earnings. However, when using the accrual–cash flow measure of conservatism (Ball and Shivakumar, 2005), it is found that auditor tenure is positively (negatively) associated with conservatism for less (more) important clients. The results suggest that longer auditor tenure may have a negative impact on audit quality in certain countries where accounting quality has been found to be poor. Therefore, the new EC regulation requiring mandatory auditor rotation may in fact improve audit quality for firms in Greece. Research limitations/implications This study’s sample consists of firms on the Athens Stock Exchange for the period of 1998-2011. This sample was purposely selected because of the unique conditions of rampant earnings management and low incentive in Greece for the auditors to exert effort to detect such practices. Moreover, Greece is subject to the new EC regulations requiring mandatory auditor rotation beginning in 2014. Future studies could examine this issue in alternate settings and over different time periods. Also, other cross-sectional variations among firms which affect the association between auditor–client tenure and audit quality may exist. Practical implications The findings are important to regulators such as the EC and indicate that Greece may be an appropriate setting in which to require mandatory auditor rotation. These results are also useful to auditors who wish to improve the audit quality and the public’s perception of their work. Originality/value Auditor tenure has been the subject of considerable debate, and regulators contend that long auditor tenure reduces audit quality. There may be a valid argument in favor of mandatory auditor rotation in countries particularly susceptible to low accounting quality due to issues such as rampant earnings management. Greece appears to be one such example, and this study provides support in favor of that argument by demonstrating that longer auditor tenure may lead to lower accounting quality in terms of conservatism. Therefore, the recent EC regulation may result in improved audit quality for firms in Greece.

Group affiliation and corporate debt maturity: Co-insurance or expropriation

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jagan Kumar Sur ◽  
Yogesh Chauhan
Keyword(s):  
Business Group ◽  
Debt Maturity ◽  
Least Square ◽  
Corporate Debt ◽  
Group Affiliation ◽  
Private Debt ◽  
Content Type ◽  
Unrelated Diversification ◽  
Business Group Affiliation ◽  
The Impact

PurposeWe examine how business group affiliation affects corporate debt maturity.Design/methodology/approachThis study employs the financial data of all listed Indian companies obtained from the CMIE database for 2011–2018. The ordinary least square, firm-fixed effect and Fama–Macbeth regression methods are used for empirical analysis. We use propensity score matching and difference-in-difference method to address endogeneity issues. Further, two-stage least square (2SLS) regression is performed to mitigate the endogeneity that stems from simultaneity between debt maturity and leverage.FindingsUsing Indian firms, we report that group affiliation is positively associated with corporate debt maturity; group firms use more long-term debt compared to similar standalone firms. We also observe that the positive effect of group affiliation on debt maturity is more pronounced in business group firms associated with a group having more resources and having unrelated diversification. However, information asymmetry and moral hazard problems weaken the impact of group affiliation on debt maturity structure of a firm. Overall, our results are consistent with co-insurance benefits that are an argument for the presence of business groups in emerging markets.Originality/valueThis study contributes to the existing literature by testing the role of group affiliation on corporate debt maturity decisions in the Indian market context where market imperfections persuade firms to borrow from banks. This is also the first study on determinants of corporate debt maturity that distinguishes between public and private debt.

Does CSR reporting indicate strong corporate governance?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Siew H. Chan ◽  
Timothy S. Creel ◽  
Qian Song ◽  
Yuliya V. Yurova
Keyword(s):  
Corporate Governance ◽  
Audit Committee ◽  
Audit Quality ◽  
Sustainability Reporting ◽  
Global Reporting Initiative ◽  
Content Type ◽  
Multiple Measures ◽  
Csr Reporting ◽  
Auditor Tenure ◽  
The Relationship

Purpose This study aims to investigate the relationship between companies filing versus those not filing corporate social responsibility (CSR) reports and corporate governance. Design/methodology/approach The websites of US publicly traded companies were examined for commitment to CSR or sustainability reporting based on the preparation of voluntary reports. This information provided the CSR measure, the key independent variable in this study. The data used to compute discretionary accruals (based on the modified Jones model) were obtained from Compustat. Data on auditor tenure were retrieved from Audit Analytics. The number of members and financial experts on an audit committee were gathered from proxy reports filed with the US Securities and Exchange Commission. Findings Companies filing CSR reports have higher audit quality, higher audit committee quality, increased auditor tenure and lower auditor dismissal compared to those not filing CSR reports. The findings support stakeholder theory. Research limitations/implications This study’s utilization of multiple measures of corporate governance provides insight into the robustness of the relationship between CSR reporting and corporate governance. Further, this research uses a different measure of CSR reporting; that is, companies that voluntarily prepared separate CSR reports following or not following the Global Reporting Initiative (GRI) guidelines compared to reports prepared following the GRI guidelines. This approach increases the size and diversity (i.e. industries) of the sample (Kolk, 2003; Waddock and Graves, 1997). Practical implications The findings suggest that companies engage in CSR reporting to indicate strong corporate governance. Originality/value This study uses multiple measures of corporate governance to demonstrate the positive relationship between CSR behavior (measured via filing of CSR reports) and corporate governance.

International new ventures and firm performance: evidence from India

2018 ◽  
Vol 30 (6) ◽  
pp. 645-659
Author(s):  
Mohammad Fuad ◽  
Mohammad Akbar
Keyword(s):  
Firm Performance ◽  
New Ventures ◽  
Business Group ◽  
International New Ventures ◽  
Group Affiliation ◽  
Content Type ◽  
Business Group Affiliation ◽  
Positive Effect ◽  
Moderating Role

Purpose This study aims to explore the role of liberalization, business group affiliation and degree of internationalization (DOI) on the performance of Indian international new ventures (INVs). Design/methodology/approach The study identifies Indian INVs incorporated between 1991 and 2010 against the backdrop of liberalization. To test various hypotheses, a random effects panel regression analysis was conducted for publicly listed Indian INVs. Findings The results highlight that business group affiliation and DOI are positively related to INV performance. Further, liberalization negatively moderates the relationship between group affiliation and INV performance. The authors’ findings indicate that as institutions improve, the positive effect of business group affiliation on firm performance decreases in emerging markets. Research limitations/implications This paper highlights the benefits accruing to business group affiliated INVs and the moderating role of liberalization on firm performance. Future studies may augment the authors’ understanding of INV performance by testing heterogeneity within business groups and their impact on INV performance across other emerging economies. Practical implications As institutional reforms strengthen over time, the positive effect of group affiliation on INV performance declines. Hence, managers of group affiliates need to adapt to the changing institutions faster and develop their fit with the institutional environment earlier than standalone firms, to mitigate their profitability issues. Originality/value To the best of the authors’ knowledge, this is the first paper to discuss the role of business group affiliation and the moderating role of liberalization on INV performance with theoretical and managerial implications.

Performance of business group affiliated firms in emerging markets

2018 ◽  
Vol 13 (6) ◽  
pp. 1538-1558 ◽  
Author(s):  
Anish Purkayastha
Keyword(s):  
Emerging Markets ◽  
Business Group ◽  
Causal Chain ◽  
Superior Performance ◽  
Group Affiliation ◽  
Strategic Decisions ◽  
Content Type ◽  
Subsequent Performance ◽  
Mediating Role ◽  
Business Group Affiliation

Purpose The purpose of this paper is to explore the existing mechanism through which business group affiliated firms in emerging markets (EMs) continue to generate superior performance. Design/methodology/approach The authors build our argument on the basis of how business group affiliation in EM facilitates internationalization and investment into innovation in affiliated firms compared to un-affiliated firm, resulting in higher firm performance. The authors use advance statistical modeling – causal mediation analysis to separate direct effect and indirect effect of business group affiliation in EM on performance through internationalization and investment into innovation of business group affiliated firms as mediating variables. Findings Based on 122,479 observations (firm year) from 17,235 Indian business group affiliated and un-affiliated firms, the findings help to identify that internationalization and investment into innovation of business group affiliated firms do have a mediating role in affiliation–performance relationship for EM business groups. Originality/value This study unravels the existing causal chain between business group affiliation in EMs and subsequent performance of affiliated firms. The authors complement institutional argument for superior performance of business group affiliation and focus on the performance implication of mediating strategic decisions in affiliated firms.

The relationship between narcissism, managerial overconfidence and comparability of financial statements of listed companies

2021 ◽  
Vol 19 (5) ◽  
pp. 681-700
Author(s):  
Mohammad Almaleki ◽  
Mahdi Salehi ◽  
Mahdi Moradi
Keyword(s):  
Stock Exchange ◽  
Chief Executive ◽  
Financial Statements ◽  
Business Environment ◽  
Multiple Regression Model ◽  
Content Type ◽  
Institutional Settings ◽  
Managerial Overconfidence ◽  
The Impact ◽  
The Relationship

Purpose This study aims to investigate the impact of managerial narcissism and overconfidence on financial statements’ comparability. In other words, this paper seeks to answer the question of whether the personality characteristics of managers may affect the level of financial statements’ quality of commercial entities or not. Design/methodology/approach The research hypotheses are tested using a sample of 896 observations taken from the Tehran Stock Exchange and 245 observations from the Iraqi Stock Exchange during 2012 and 2018 using the multiple regression model based on the combined data technique. Findings The findings show that managerial narcissism is positively and significantly associated with Iran’s financial statement comparability. In contrast, Iraqi data articulate a negative association between these two variables. This paper finds that Chief Executive Officer overconfidence and financial statements’ comparability are negatively related in both countries. Following the market variation, the different findings suggest that institutional settings such as the general managerial style, adopting international accounting standards (now IFRS) leading to the extent of auditing market globally in Iraq and suffering from international sanctions in Iran, the governing business environment may play an allocative role in preparing financial statements. Originality/value The present research is the first research conducted in two emerging markets (Iran and Iraq) examining the relationship between managers’ narcissism and overconfidence and financial statements’ comparability. Therefore, the present research in this area can significantly contribute to the development of science and knowledge.

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