Gregory D. Kane and Uma Velury
This study investigates the relation between managerial ownership and the audit quality of the firm. In modern corporations, the separation of ownership and control creates…
Abstract
This study investigates the relation between managerial ownership and the audit quality of the firm. In modern corporations, the separation of ownership and control creates incentives for managers to maximize their own wealth at the expense of shareholders (Jensen and Meckling 1976). Manager‐owners thus have an incentive to reduce associated agency costs by providing high quality auditing. High audit quality should thus be increasing as managerial ownership decreases. A related agency problem is that of entrenchment‐ whereby managers, by virtue of their increased voting power, have increasing power to shirk and procure perquisites at shareholders' expense. The associated increasing agency risk implies that, when the risk of entrenchment decreases, the need, and thus provision, of high audit quality should also decrease. Based on these arguments, and following prior empirical research, we posit and find that at low and high levels of managerial ownership (below 5% and above 25%), where entrenchment is not increasing, audit quality is decreasing in managerial ownership. At intermediate levels, where entrenchment arguably does increase, it is unclear which effect (divergence‐of‐interests or entrenchment) dominates. For our sample, we document a negative association in this region, a result consistent with the notion that divergence‐of‐interests is the primary agency‐related determinant of audit quality at all levels.
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David S. Jenkins, Gregory D. Kane and Uma Velury
We investigate the relative roles of key components of earnings change in explaining the value relevance of earnings across different life‐cycle stages of the firm. We hypothesize…
Abstract
We investigate the relative roles of key components of earnings change in explaining the value relevance of earnings across different life‐cycle stages of the firm. We hypothesize that firms in different life‐cycle stages take different strategic actions: change in sales is emphasized in the growth and mature stages, while in later stages, profitability is emphasized. Because payoffs to such strategies vary across the life‐cycle, the stock market reaction to the success firms have in employing these strategic actions is likely to vary across the life‐cycle. To test our hypotheses, we disaggregate changes in earnings into three key components: earnings change from change in sales, earnings change from change in profitability, and an interaction term comprising both sales change and profitability change. Our findings are consistent with our hypotheses: when firms are in the growth stage, the value‐relevance of change in sales is relatively greater than that of change in profitability. In the mature stage, the value relevance of change in profitability increases, relative to that of change in sales. When firms are in stagnant stage, the value‐relevance of changes in profitability are relatively greater than that of change in sales. Collectively, the results demonstrate a shift in the value relevance of earnings components from a growth emphasis early in the life‐cycle to a profitability emphasis later in the life‐cycle.
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Khaled Aljifri and Mohamed Moustafa
The main aim of this study is to investigate empirically the effect of some internal and external corporate governance mechanisms on the UAE firm performance (i.e., Tobin’s q)…
Abstract
The main aim of this study is to investigate empirically the effect of some internal and external corporate governance mechanisms on the UAE firm performance (i.e., Tobin’s q). Like many of the developing countries all over the world, the UAE has recently initiated the application of the international standards of corporate governance as a part of its merge with the global economy. This study utilizes a sample of 51 firms using the accounting and market data available for 2004. The sample firms are all listed in either the Dubai Financial Market or the Abu Dubai Securities Market. The cross‐sectional regression analysis is employed to test the hypotheses of the study. The results of this study show that the governmental ownership, the debt ratio (total debt/total assets), and the payout dividends ratio have a significant impact on the firm performance; whereas the institutional investors, the board size, the firm size (sales), and the audit type show a non‐significant impact. This study concludes that three of the corporate governance mechanisms in the UAE used in this study appear to be strong enough to affect the firm performance. However, the other four mechanisms are found to have a weak effect on the firm performance which could be a result of the significant absence of some aspects of corporate governance practices and lack of enforcement of rules.
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Fernando Maciel Ramos, Letícia Gomes Locatelli, Graça Azevedo and Cristiano Machado Costa
Social factors can shape economic decisions. Corporate governance (CG) studies and guidelines usually neglect that the chief executive officer (CEO) and board members may be…
Abstract
Purpose
Social factors can shape economic decisions. Corporate governance (CG) studies and guidelines usually neglect that the chief executive officer (CEO) and board members may be socially tied. This study investigates the effects of social ties between the CEO and board members on earnings management (EM).
Design/methodology/approach
The authors run a series of regressions using a sample of Brazilian companies listed on the Brazilian Stock Exchange [B]³ between 2011 and 2017 to assess the effect of the social ties between the CEO and board members on EM using a social ties index. The authors also employ five robustness tests to verify the consistency of results, including alternative proxies of EM and social ties and an estimation using fixed effects.
Findings
After developing and computing a social ties index between the CEOs and members of the board of directors (BD) and the fiscal council (FC), the study’s findings indicate that a significant level of social ties between the CEO and BD has a negative impact on EM. However, for FC members, the authors found non-significant results.
Originality/value
Unlike previous studies, the authors built a social tie index (STI) from five elements of social ties assessed in an environment with a two-tier board system. Results show that elements of social interactions and personal relationships can benefit the company, as a CEO's level of social ties with the BD reduces EM practices.