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Foreign Monitoring and Audit Quality: Evidence from Korea

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  • Sang Cheol Lee

    () (College of Business Administration, Dongguk University-Seoul, 30, Pildong-ro 1gil, Jung-gu, Seoul 04620, Korea)

  • Mooweon Rhee

    () (School of Business, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 03722, Korea)

  • Jongchul Yoon

    () (College of Business Administration, Keimyung University, 1095 Dalgubeol-daero, Dalseo-Gu, Daegu 42601, Korea)

Abstract

This study investigates the effects of both foreign majority shareholders and foreign investors’ participation in the board of directors on audit quality, as reflected by auditor size and audit fees. In addition, the study examines the moderating effect of an agency problem on the relationship between foreign investors and the monitoring of audit quality. Using 1574 non-financial firm-year observations listed on the Korea Stock Exchange from 2000 to 2003, we find that the presence of foreign investors such as foreign block shareholders and foreign outside directors increases audit quality. At the same time, the monitoring role of foreign block shareholders is more powerful than that of foreign external directors. Moreover, the foreign block shareholders in professional management-controlled firms exert a more profound influence on audit quality than do those in owner-controlled ones. These test results imply that foreign investors with independence, expertise, and monitoring incentives could play an important role in improving the corporate governance system in Korea, which in turn would not only enhance firm value, but also strengthen the sustainability of Korean companies.

Suggested Citation

  • Sang Cheol Lee & Mooweon Rhee & Jongchul Yoon, 2018. "Foreign Monitoring and Audit Quality: Evidence from Korea," Sustainability, MDPI, Open Access Journal, vol. 10(9), pages 1-22, September.
  • Handle: RePEc:gam:jsusta:v:10:y:2018:i:9:p:3151-:d:167600
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    References listed on IDEAS

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    1. repec:gam:jsusta:v:11:y:2019:i:4:p:1045-:d:206680 is not listed on IDEAS
    2. repec:gam:jsusta:v:11:y:2019:i:9:p:2643-:d:229330 is not listed on IDEAS
    3. repec:gam:jsusta:v:11:y:2018:i:1:p:102-:d:193053 is not listed on IDEAS

    More about this item

    Keywords

    foreign block shareholders; foreign external directors; audit quality; auditor size; audit fees; agency problem;

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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