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Firm ownership type, earnings management and auditor relationships: evidence from India

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Author Info

  • Saibal Ghosh

Abstract

Purpose – Using data on Indian listed companies for 2005, the purpose of this paper is to examine how firm ownership relates to auditor choice. More specifically, the author tests several hypotheses about the links between firm ownership, auditor relationships and earnings management. Design/methodology/approach – Several econometric techniques were employed including ordinary least squares, logit regression, ordered logit regression, Poisson and negative binomial regression to test the association between firm ownership and auditors. Findings – The results indicate that firms having high discretionary accruals are less likely to be audited by domestic entities. The analysis also suggests that domestic auditors are less likely to be preferred by both foreign and Indian private corporations. In addition, the analysis indicates that audit fees are higher for firms with higher earnings opacity. Research limitations/implications – Driven by data availability, the paper relies on cross-sectional data. Practical implications – The results demonstrate that firm ownership is an important consideration for firm auditor relationships. Thus, policymakers should not worry if firms persistently choose to do business with the same auditor. Second, the results are a pointer to the fact that given the differences in their governance structures, the role of domestic and foreign auditors in servicing business groups and state-owned corporations is distinctly different. Finally, the evidence suggests that the choice of multiple auditors is more to address the complexities involved in multiple business lines, as opposed to curtailing audit fees. Originality/value – To the author's knowledge, this is perhaps the first study for an emerging economy and more certainly for India to examine the firm ownership-auditor nexus.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

Volume (Year): 26 (2011)
Issue (Month): 4 (May)
Pages: 350-369

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Handle: RePEc:eme:majpps:v:26:y:2011:i:4:p:350-369

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Related research

Keywords: Auditors; Corporate governance; Corporate ownership; External auditing; India; Organizational earnings;

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References

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  1. Chhibber, Pradeep K & Majumdar, Sumit K, 1999. "Foreign Ownership and Profitability: Property Rights, Control, and the Performance of Firms in Indian Industry," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 209-38, April.
  2. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
  3. Nandini Gupta, 2005. "Partial Privatization and Firm Performance," Journal of Finance, American Finance Association, vol. 60(2), pages 987-1015, 04.
  4. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
  5. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
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  7. Chaney, Paul & Faccio, Mara & Parsley, David, 2009. "The Quality of Accounting Information in Politically Connected Firms," MPRA Paper 21116, University Library of Munich, Germany.
  8. Ghosh, Saibal, 2007. "External Auditing, Managerial Monitoring and Firm Valuation: An Empirical Analysis for India," MPRA Paper 17142, University Library of Munich, Germany.
  9. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
  10. Yuan Ding & Hua Zhang & Junxi Zhang, 2007. "Private vs State Ownership and Earnings Management: evidence from Chinese listed companies," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(2), pages 223-238, 03.
  11. Van Tendeloo Brenda & Vanstraelen A., 2005. "Earnings Management and Audit Quality in Europe: Evidence from the Private Client Segment Market," Working Papers 2005012, University of Antwerp, Faculty of Applied Economics.
  12. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  13. Joseph P. H. Fan & T. J. Wong, 2005. "Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia," Journal of Accounting Research, Wiley Blackwell, vol. 43(1), pages 35-72, 03.
  14. Francis, Jere R., 1984. "The effect of audit firm size on audit prices : A study of the Australian Market," Journal of Accounting and Economics, Elsevier, vol. 6(2), pages 133-151, August.
  15. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
  16. Desender, Kurt A. & Garcia-Cestona, Miguel A. & Crespi, Rafel & Aguilera, Ruth V., 2009. "Board Characteristics and Audit Fees: Why Ownership Structure Matters?," Working Papers 09-0107, University of Illinois at Urbana-Champaign, College of Business.
  17. Craswell, Allen & Stokes, Donald J. & Laughton, Janet, 2002. "Auditor independence and fee dependence," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 253-275, June.
  18. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
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