scholarly journals Legal Systems and Earnings Quality: The Role of Auditor Industry Specialization

2007 ◽  
Vol 26 (2) ◽  
pp. 25-55 ◽  
Author(s):  
Soo Young Kwon ◽  
Chee Yeow Lim ◽  
Patricia Mui-Siang Tan
Keyword(s):  
Earnings Quality ◽  
Legal Environment ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response ◽  
International Setting ◽  
Using Data ◽  
The Impact ◽  
Industry Specialist

This paper extends prior studies in auditor industry specialization to an international setting and examines if the impact of industry specialist auditors on earnings quality is dependent on the legal environments. Using data for 28 countries over 20 industries from 1993 to 2003, we find that clients of industry specialist auditors have lower discretionary current accruals and higher earnings response coefficients than clients of nonspecialist auditors. In addition, we find that the impact of auditor industry specialization on earnings quality increases as the legal environment weakens. Collectively, the results suggest that the benefits from engaging the services of industry specialist auditors increase as a country's legal environment shifts from a strong to a weak environment. Our results are robust to the inclusion of additional control variables.

Auditor Industry Specialization and Earnings Quality

2003 ◽  
Vol 22 (2) ◽  
pp. 71-97 ◽  
Author(s):  
Steven Balsam ◽  
Jagan Krishnan ◽  
Joon S. Yang
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Prior Work ◽  
Brand Name ◽  
Absolute Level ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

scholarly journals Managerial ability, earnings quality and ISIS: evidence from Iraq

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ameneh Bazrafshan ◽  
Naser Makarem ◽  
Reza Hesarzadeh ◽  
Wafaa SalmanAbbood
Keyword(s):  
Stock Exchange ◽  
Emerging Market ◽  
Earnings Quality ◽  
Islamic State ◽  
Managerial Ability ◽  
Content Type ◽  
Earnings Response Coefficient ◽  
Earnings Response ◽  
Using Data ◽  
The Impact

PurposeThis study investigates the association between managerial ability and earnings quality in firms listed on the Iraq Stock Exchange and how the emergence of the Islamic State of Iraq and Syria (ISIS) influences the association.Design/methodology/approachThis study uses a sample of firms listed on the Iraq Stock Exchange over the period 2012–2018. Managerial ability is quantified using data envelopment analysis, and earnings quality is measured by earnings restatement, earnings persistence, accruals quality and earnings response coefficient. Panel regression analysis is used to examine the research hypotheses.FindingsThe findings indicate that managerial ability positively affects earnings quality of Iraqi firms and that ISIS weakens the relationship between managerial ability and earnings quality. These findings are robust to the alternative measures of managerial ability, as well as to various approaches used to address endogeneity including propensity-score matching and a difference-in-differences analysis.Originality/valueThis study provides insight into the impact of managerial ability on earnings quality in an under-studied emerging market. Furthermore, this study broadens the existing literature about the financial consequences of a modern terrorist group, ISIS.

Short-sale refinancing and earnings response coefficient: evidence from China

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tingli Liu ◽  
Ying Jiang ◽  
Lizhong Hao
Keyword(s):  
Corporate Governance ◽  
Property Rights ◽  
Emerging Market ◽  
Earnings Quality ◽  
Sample Selection ◽  
Short Selling ◽  
Content Type ◽  
Short Sale ◽  
Earnings Response ◽  
The Impact

Purpose Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed companies remains unclear. This paper aims to examine the impact of short-sale refinancing on earnings quality after the short-selling constraints have been released. The authors further explore whether this impact is subject to the nature of property rights and shareholding structures. Design/methodology/approach This study is based on a sample of A-share firms in China for the period 2014–2016. The authors use earnings response coefficients (ERC) as a proxy for earnings quality. To empirically examine this issue, a matching sample is generated by using propensity score matching method (PSM) to reduce sample selection bias. Findings This study provides evidence that deregulation of short selling has positive external effect on corporate governance. The results indicate that the potential short-selling opportunities can effectively suppress earnings manipulation and improve earnings quality. However, the impact of short selling on earnings quality varies for companies with different nature of property rights and shareholding structure. Originality/value To the best of the authors’ knowledge, this is the first study to investigate the relationship between short selling and earnings quality in the unique setting of short-sale refinancing. This study provides new evidence on the impact of short selling at the micro level and calls for further deregulation of short selling. In addition, this study contributes to existing studies on short-sale refinancing by examining an emerging market.

Audit Committee Director-Auditor Interlocking and Perceptions of Earnings Quality

2014 ◽  
Vol 33 (4) ◽  
pp. 41-70 ◽  
Author(s):  
Jeng-Fang Chen ◽  
Yan-Yu Chou ◽  
Rong-Ruey Duh ◽  
Yu-Chen Lin
Keyword(s):  
Audit Committee ◽  
Positive Relationship ◽  
Earnings Quality ◽  
Earnings Response Coefficients ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Financial Expertise ◽  
Earnings Response ◽  
Reported Earnings ◽  
Positive Effect

SUMMARY: Using earnings response coefficients (ERCs) from returns-earnings regressions as a proxy for investor perceptions of earnings quality, we analyze how investors perceive reported earnings when companies with interlocking audit committee directors are audited by the same audit firm (hereafter, AC director-auditor interlocking). Our empirical results show that the extent of AC director-auditor interlocking is significantly and positively associated with ERCs. By dividing the sample period into pre-Sarbanes-Oxley Act (pre-SOX, 1998 through 2001) and post-SOX (2002 through 2010) periods, we find that the significantly positive effect of AC director-auditor interlocking on ERCs only exists in the post-SOX period, indicating that investors have reacted more positively to AC director-auditor interlocking after the implementation of SOX, which requires that audit committee members be independent. Finally, using financial expertise data for the period 2003 to 2010, we find that the positive relationship between the extent of AC director-auditor interlocking and ERCs is more pronounced when interlocking audit committee directors are financial experts than when they are not financial experts.

Voluntary Disclosure of Disaggregated Balance Sheet and Cash Flow Information Around Restatements

2021 ◽  
Author(s):  
Kai Chen ◽  
Darren Henderson ◽  
Christine I Wiedman
Keyword(s):  
Cash Flow ◽  
Voluntary Disclosure ◽  
Balance Sheet ◽  
Reporting Quality ◽  
Information Uncertainty ◽  
Earnings Response Coefficients ◽  
Earnings Response ◽  
Earnings Releases ◽  
Flow Information ◽  
The Impact

We examine changes in voluntary disclosure of balance sheet and cash flow (BS/CF) information in earnings releases after restatement announcements. We consider these disclosures to be particularly relevant in the restatement context since they help investors interpret accruals and assess reporting quality at a time when information uncertainty is high. We find that BS/CF disclosures drop significantly for at least five quarters following restatement announcements, particularly for severe restatements and those restatements more likely to lead to litigation, and less for firms likely to benefit from reputation-repairing activities. We next consider the impact of BS/CF changes on earnings informativeness and find significantly lower post-restatement earnings response coefficients for firms ceasing BS/CF disclosure, but not otherwise. Overall, we argue that litigation concerns provide a strong disincentive for disclosure following restatement announcements. Our findings add to a growing literature on the importance of disaggregated BS/CF information in interpreting accruals.

Audit tenure, auditor specialization and audit report lag

2014 ◽  
Vol 29 (6) ◽  
pp. 490-512 ◽  
Author(s):  
Mai Dao ◽  
Trung Pham
Keyword(s):  
National Level ◽  
Positive Association ◽  
Early Years ◽  
Audit Report ◽  
Industry Specialization ◽  
Content Type ◽  
Audit Firm ◽  
Differentiation Strategy ◽  
Auditor Industry Specialization ◽  
The Impact

Purpose – This paper aims to examine the association between audit firm tenure and audit report lag (ARL) and the impact of auditor industry specialization on the association between audit firm tenure and ARL. Design/Methodology/Approach – Using Habib and Bhuiyan’s (2011) method of measuring auditor industry specialization, the authors examine the sample of 7,291 firm-year observations from 2008 to 2010. Findings – The authors find that auditor industry specialization (regardless of city-level, national-level and joint city- and national-level industry specialization) weakens the positive association between ARL and short audit firm tenure, suggesting that auditor industry specialization complements the negative effect of short audit firm tenure on ARL. Originality/value – First, the authors add to the literature by answering the question of whether hiring industry auditor specialists is an effective way to shorten ARL created by short audit tenure. The authors provide some evidence that the concern of short audit tenure leading to longer ARL is reduced by hiring an industry-specialized auditor. Prior research mainly focuses on identifying the determinants of ARL without going further to find out which are the effective ways to reduce the audit delay. Second, their findings can somehow resolve the debate on whether audit firm rotation should be mandatory. A new auditor’s lack of knowledge of clients’ business operations during the early years of audit engagements results in longer ARL, which eventually influences the clients’ financial performance. The authors' result suggests the firms can reduce this adverse consequence by hiring an industry-specialized auditor. Finally, their findings may provide helpful information to firms in selecting external auditors, public accounting firms in selecting a differentiation strategy and regulators in mandating audit firm rotation.

National Level, City Level Auditor Industry Specialization and Cost of Debt

2010 ◽  
Vol 24 (3) ◽  
pp. 395-417 ◽  
Author(s):  
Chan Li ◽  
Yuan Xie ◽  
Jian Zhou
Keyword(s):  
Audit Quality ◽  
Credit Rating ◽  
National Level ◽  
Debt Financing ◽  
Cost Of Debt ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Debt Capital ◽  
Bond Spreads ◽  
Industry Specialist

SYNOPSIS: We examine the relation between industry specialist auditors and cost-of-debt financing using a national and city level industry specialist framework. Consistent with the assumption that higher audit quality is associated with lower information risk, which benefits clients in raising debt capital, we find that firms audited by city level industry specialist auditors, either alone or jointly with national level industry specialist auditors, enjoy significantly lower cost-of-debt financing measured by both credit rating and bond spread. Our results suggest that, compared to clients of non-industry specialists, firms’ odds of worse credit ratings are 0.859 (0.664) times lower, and their bond spreads are 17 (16) basis points lower if they are clients of city-level-only (joint national and city level) industry specialists. In addition, our evidence shows that, for joint national and city level industry specialists, both information and insurance roles are significant to reduce cost-of-debt financing.

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