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Business Group Affiliation, Earnings Management and Audit Quality: Evidence from Bangladesh

Author

Listed:
  • Mohammad Badrul Muttakin
  • Arifur Khan
  • Dessalegn Getie Mihret

Abstract

Purpose - This study investigates 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 employed to measure audit quality: auditor size and industry specialisation. Findings - Our results show 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.

Suggested Citation

  • Mohammad Badrul Muttakin & Arifur Khan & Dessalegn Getie Mihret, 2017. "Business Group Affiliation, Earnings Management and Audit Quality: Evidence from Bangladesh," Managerial Auditing Journal, Emerald Group Publishing, vol. 32(4/5), pages 427-444, April.
  • Handle: RePEc:eme:majpps:maj-01-2016-1310
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    Citations

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    Cited by:

    1. Ezzi Ferdaws & Jarboui Anis & Zouari-Hadiji Rim, 2020. "CSR categories and R&D investment: the moderating role of Managerial emotional intelligence," Management & Marketing, Sciendo, vol. 15(1), pages 17-37, March.
    2. Muhammad Bilal Saeed & Syed Kashif Saeed, 2018. "Corporate Governance and Accounting Conservatism: Moderating role of Audit Quality and Disclosure Quality," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 10(2), pages 123-150, June.
    3. Pathak, Rajesh & Ranajee,, 2020. "Earnings quality and corporate payout policy linkages: An Indian context," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Malik Abu Afifa & Fares Alsufy & Ahmad Abdallah, 2020. "Direct and Mediated Associations among Audit Quality, Earnings Quality, and Share Price: The Case of Jordan," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 500-516.

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