Audit Quality and the Market Value of Cash Holdings: The Case of Office-Level Auditor Industry Specialization

2014 ◽  
Vol 34 (2) ◽  
pp. 27-57 ◽  
Author(s):  
Jeong-Bon Kim ◽  
Jay Junghun Lee ◽  
Jong Chool Park
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Capital Investment ◽  
Audit Quality ◽  
Cash Holdings ◽  
Market Value ◽  
High Quality ◽  
Value Of Cash ◽  
Office Level ◽  
Industry Specialist

SUMMARY This study investigates the monitoring role of high-quality auditors defined as office-level industry specialists in the stock market valuation of cash assets. We find that the market value of cash holdings is significantly higher for the client of an industry specialist auditor. The marginal value of cash is 34 cents higher for the client of a joint-industry specialist at both the national and city levels than for the client of a nonspecialist. We also find that cash holdings are more closely associated with capital investment and the market value of capital investment is significantly higher when the auditor is a joint-industry specialist. Moreover, we find that the value of cash increases significantly when the client changes its auditor to a joint-industry specialist. Our findings hold even after controlling for the client's governance efficacy and financial reporting quality. Our results provide new insight into the mechanism through which high-quality audits affect firm value: External audits facilitate shareholders' monitoring over managerial cash expenditures, thereby leading market participants to attach a higher value to cash holdings.

Accounting Restatements and Corporate Cash Policy

2017 ◽  
Vol 35 (2) ◽  
pp. 290-317 ◽  
Author(s):  
Huili Chen ◽  
Zhihong Chen ◽  
Dan S. Dhaliwal ◽  
Yuan Huang
Keyword(s):  
Financial Reporting ◽  
Cash Holdings ◽  
Market Value ◽  
Precautionary Savings ◽  
Difference In Differences ◽  
Accounting Restatements ◽  
Pronounced Increase ◽  
Corporate Decisions ◽  
Value Of Cash ◽  
Excess Cash

Using a difference-in-differences approach, we find that the cash holdings of firms increase significantly after announcements of irregularity-related restatements. The increase is larger for firms with a higher demand for precautionary savings and is smaller for firms with less pronounced increase in shareholder control after the restatements. Investments and repurchases of irregularity firms become more sensitive to excess cash after the restatements. In addition, we find that the market value of cash holdings increases after restatements. Overall, the evidence suggests that strengthened shareholder control reduces cash holdings, but this effect is weaker than the increase in cash holdings due to exacerbated precautionary savings concerns. Our study contributes to the literature on the effect of financial reporting credibility on real corporate decisions.

What is a Dollar Worth? The Market Value of Cash Holdings

2003 ◽  
Author(s):  
Lee Foster Pinkowitz ◽  
Rohan G. Williamson
Keyword(s):  
Cash Holdings ◽  
Market Value ◽  
Value Of Cash

Consequences of corporate sustainability reporting: evidence from an emerging market

2020 ◽  
Vol 62 (3) ◽  
pp. 243-265
Author(s):  
RMNC Swarnapali
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Stock Exchange ◽  
Emerging Market ◽  
Earnings Quality ◽  
Corporate Sustainability ◽  
Market Value ◽  
Sustainability Reporting ◽  
Content Type ◽  
Sustainability Disclosure

Purpose The purpose of this paper is to discover whether corporate sustainability disclosure has a potential impact on the market value and earnings quality of firms in an emerging market. Design/methodology/approach The data were collected from 220 companies listed in the Colombo Stock Exchange (CSE) in Sri Lanka during the period 2012-2016. Firm value proxies by Tobin’s Q, while earnings quality proxies by discretionary accruals (DAC). The study is premised on value-enhancing theory for firm value and transparent financial reporting perspective for earnings quality. Regression analyses are executed on the panel data to achieve the study objectives. Findings The results reveal a positive relationship between sustainability reporting (SR) and firm market value, accepting the value-enhancing theory while rejecting the value-destroying theory. This finding suggests that investors pay a premium in the financial markets for firms that perform in an environmentally and socially responsible manner, compared to firms that do not perform in a similar manner. In the same vein, the results reveal that sustainability disclosure and DAC are negatively and significantly associated, resulting in high-quality earnings. The result is consistent with the transparent financial reporting hypothesis, which is also in line with the managers’ integrity motivation. Originality/value This is the first study investigating the consequences of SR that is specific to the Sri Lankan context. Owing to the sparse studies on consequences of SR, this study contributes significantly to the extant literature by broadening the geographical coverage to include a developing country setting.

Does financial reporting regulation influence the value of cash holdings?

2020 ◽  
Vol 59 ◽  
pp. 52-67
Author(s):  
Ahmet Karpuz ◽  
Kirak Kim ◽  
Neslihan Ozkan
Keyword(s):  
Financial Reporting ◽  
Cash Holdings ◽  
Value Of Cash

scholarly journals Audit committee compensation, best practices and audit fees

2019 ◽  
Vol 50 (1) ◽  
Author(s):  
Bum-Jin Park
Keyword(s):  
Best Practices ◽  
Financial Reporting ◽  
Regression Models ◽  
Audit Committee ◽  
Best Practice ◽  
Audit Quality ◽  
Positive Association ◽  
Audit Fees ◽  
High Quality ◽  
The Relationship

Background: It is extremely important that an audit committee (AC) monitors a company’s financial reporting process, and that the committee engages a high-quality auditor to carry this out effectively. Prior research on ACs has paid much attention to the relationship between AC best practices and audit fees (AF). Although compensation is a means of aligning interests between ACs and stakeholders, previous studies have neglected the complementary interaction between AC compensation and compliance with best practices on audit quality.Objectives: The purpose of this study is to investigate how compensation for ACs affects AF, and how the association is moderated by compliance with best practices to capture effective monitoring.Method: The regression models are estimated to verify how the relationship between AC compensation and AF is moderated by AC compliance with best practice. Moreover, the logistic regression models are used to investigate how the relationship between AC compensation and the opportunistic achievement of earnings goals is moderated by AC compliance with best practice.Results: The findings show a positive association between the levels of compensation AC members receive and AF, which is reinforced in firms that have ACs that comply with all best practices.Conclusion: The results suggest that highly paid ACs engage high-quality auditors to complement their function of monitoring management and AC compensation and compliance with best practices are complementary to enhance audit quality. This study thus provides the interesting insights that can be applicable to countries with requirements relating to the compensation schemes for ACs or the formation of the AC.

scholarly journals The Role Of Cash Holdings, Working Capital, Dividend Payout On Capital Investment

2018 ◽  
Vol 34 (3) ◽  
pp. 419-426
Author(s):  
Andrew Chan
Keyword(s):  
Cash Flow ◽  
Firm Value ◽  
Capital Investment ◽  
Stock Exchange ◽  
Cash Holdings ◽  
Payout Policy ◽  
Working Capital ◽  
Dividend Payout ◽  
Investment Spending ◽  
The Relationship

An objective of this paper is to investigate the relationship between firms' capital investment spending, cash holdings, and working capital in an expanding Asian financial market.  A sample of publicly traded manufacturing firms on the Hong Kong Stock Exchange was examined during the period 2005-2014. The empirical results provide strong and statistically significant evidence on the effect of cash flow on investment.  Working capital also exhibits significant relationship with capital investment spending, though the relationship is not as strong and significant as that with cash flow and cash holding.  Firms with low dividend payout policy over the sample period depended heavily on cash flow, changes in cash flow and, to a lesser extent, on working capital to finance spending on fixed plant and equipment.  These results suggest that the effect of capital investment spending financed by internal cash flow on firm value may depend on a firm's dividend payout.

scholarly journals Does Industry Specialist Auditor Provide More Insights in Their audit report? An Empirical Study of Key Audit Matters Section

2021 ◽  
pp. 69-94
Author(s):  
Li-Jen He
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
The United States ◽  
International Standards ◽  
Audit Report ◽  
Disclosure Quality ◽  
Industry Specialization ◽  
Audit Reports ◽  
Industry Specialist

Abstract In 2015, International Auditing and Assurance Standards Board (IAASB) released new International Standards on Auditing 701 and required auditors to disclose key audit matters (KAM) in the audit report. Similar standards were also released in the United States in 2017 and the United Kingdom and Ireland Financial Reporting Council (FRC) in 2014. As KAM are expected to inform on matters of the greatest significance during an audit, before exploring the question regarding whether investors will obtain useful information from additional matter disclosures, the anterior consideration may be in regard to how audit quality affects the disclosure quality of KAM. This study use hand-collected data of the KAM disclosed in the audit reports of Taiwanese listed companies in 2016 to explore the association between auditor industry specialization and audit quality by the disclosure of KAM in new audit reports. The empirical results show that the association between the industrial specialist audit partner and the measurement of KAM quality is significantly positively related. The findings support our hypothesis that specialist auditors’ KAM are more informative than those issued by non-specialist auditors, and provide new evidence supporting prior studies about the superior auditing ability and disclosure quality of auditor industry specialist. Keywords: Key Audit Matters, KAM, International Standards on Auditing 701, International Auditing and Assurance Standards Board.

The Role of Financial Reporting Quality in Mitigating the Constraining Effect of Dividend Policy on Investment Decisions

2013 ◽  
Vol 88 (3) ◽  
pp. 1007-1039 ◽  
Author(s):  
Santhosh Ramalingegowda ◽  
Chuan-San Wang ◽  
Yong Yu
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Dividend Policy ◽  
Investment Decisions ◽  
Reporting Quality ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
High Quality ◽  
Investment Projects

ABSTRACT Miller and Modigliani's (1961) dividend irrelevance theorem predicts that in perfect capital markets dividend policy should not affect investment decisions. Yet in imperfect markets, external funding constraints that stem from information asymmetry can force firms to forgo valuable investment projects in order to pay dividends. We find that high-quality financial reporting significantly mitigates the negative effect of dividends on investments, especially on R&D investments. Further, this mitigating role of financial reporting quality is particularly important among firms with a larger portion of firm value attributable to growth options. In addition, we show that the mitigating role of high-quality financial reporting is more pronounced among firms that have decreased dividends than among firms that have increased dividends. These results highlight the important role of financial reporting quality in mitigating the conflict between firms' investment and dividend decisions and thereby reducing the likelihood that firms forgo valuable investment projects in order to pay dividends. Data Availability: Data are available from public sources identified in the paper.

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