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External Auditing, Managerial Monitoring and Firm Valuation: An Empirical Analysis for India

  • Ghosh, Saibal

The paper examines how external auditing and managerial ownership relate to firm valuation. It is argued that both external auditors (which serves as an external monitoring function) and managerial ownership (which serves as an internal monitoring function) affect firm value, while internal monitoring by managers and external monitoring by auditors were viewed as substitutes or complements. After controlling for the effect of exogenous variables, the results reveal the existence of a substitution monitoring effect between auditors and the managerial group. Additionally, firm valuation is found to be a significant determinant of managerial ownership. A disaggregated analysis of firms according to size and leverage suggests the existence of a complementary monitoring effect between auditors and managers, especially for low-leveraged firms.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17142.

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Date of creation: Mar 2007
Date of revision:
Publication status: Published in International Journal of Auditing 1.11(2007): pp. 1-15
Handle: RePEc:pra:mprapa:17142
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  1. Caprio,Gerard & Honohan,Patrick & Stiglitz,Joseph E. (ed.), 2006. "Financial Liberalization," Cambridge Books, Cambridge University Press, number 9780521030991.
  2. 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.
  3. Moyer, R. Charles & Chatfield, Robert E. & Sisneros, Phillip M., 1989. "Security Analyst Monitoring Activity: Agency Costs and Information Demands," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 503-512, December.
  4. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  5. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
  6. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
  7. Ghosh, Saibal & Sensarma, Rudra, 2004. "Does monetary policy matter for corporate governance? Firm-level evidence for India," MPRA Paper 19756, University Library of Munich, Germany.
  8. Saibal Ghosh, 2006. "Do board characteristics affect corporate performance? Firm-level evidence for India," Applied Economics Letters, Taylor & Francis Journals, vol. 13(7), pages 435-443.
  9. 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.
  10. 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.
  11. 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.
  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. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  14. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  15. Ghosh, Saibal, 2006. "Did financial liberalization ease financing constraints? Evidence from Indian firm-level data," Emerging Markets Review, Elsevier, vol. 7(2), pages 176-190, June.
  16. Bhattacharya Sudipto & Chiesa Gabriella, 1995. "Proprietary Information, Financial Intermediation, and Research Incentives," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 328-357, October.
  17. repec:oup:qjecon:v:118:y:2003:i:1:p:107-155 is not listed on IDEAS
  18. Chung, Kee H. & Jo, Hoje, 1996. "The Impact of Security Analysts' Monitoring and Marketing Functions on the Market Value of Firms," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(04), pages 493-512, December.
  19. Jensen, Gerald R. & Solberg, Donald P. & Zorn, Thomas S., 1992. "Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(02), pages 247-263, June.
  20. 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.
  21. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, 04.
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