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Agency Problems and the Choice of Auditors: Evidence from the MENA Region

Author

Listed:
  • Farooq Omar

    (Department of Management, American University in Cairo, Cairo 11835, Egypt)

  • Tabine Sonia

    (School of Business Administration, Al Akhawayn University in Ifrane, Hassan II Avenue, Ifrane 53000, Morocco)

Abstract

What determines the choice of auditors in the MENA region? This paper uses the data from Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait and Bahrain and shows that the extent of agency problems in a firm dictates what sort of auditors are chosen by a firm. Our results show that high dividend payout ratios are negatively related to the appointment of one of the big-four auditors. High payout ratios are synonymous to low agency problems and thus firms feel lesser need for having one of the big-four auditors. We also show that high ownership concentration – a proxy for high agency problem – is positively related to firm’s decision of having one of the big-four auditors. High ownership concentration exacerbates agency problems between insiders and outsiders and thus induces firms to appoint one of the big-four auditors to mitigate agency problems. We also document that increased operational complexity and transactional complexity leads to hiring of one of the big-four auditors by a firm. We argue that complexity hinders investor’s ability to understand firm’s information and thus introduces agency problems. Being aware of agency problems, firms hire one of the big-four auditors to alleviate some of these problems.

Suggested Citation

  • Farooq Omar & Tabine Sonia, 2015. "Agency Problems and the Choice of Auditors: Evidence from the MENA Region," Review of Middle East Economics and Finance, De Gruyter, vol. 11(1), pages 79-97, April.
    • Handle: RePEc:bpj:rmeecf:v:11:y:2015:i:1:p:79-97:n:1
    DOI: 10.1515/rmeef-2012-0036
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    References listed on IDEAS

    as
    1. Rafael La Porta & Florencio Lopez‐de‐Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, February.
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    4. Farooq Omar & El Kacemi Youssef, 2011. "Ownership Concentration, Choice of Auditors, and Firm Performance: Evidence from the MENA Region," Review of Middle East Economics and Finance, De Gruyter, vol. 7(2), pages 1-17, September.
    5. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    6. Mckinley, S & Pany, K & Reckers, Pmj, 1985. "An Examination Of The Influence Of Cpa Firm Type, Size, And Mas Provision On Loan Officer Decisions And Perceptions," Journal of Accounting Research, Wiley Blackwell, vol. 23(2), pages 887-896.
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    8. Omar Farooq & Mohammed Seffar, 2012. "Corporate governance and its effect on the liquidity of a stock: evidence from the MENA region," International Journal of Business Governance and Ethics, Inderscience Enterprises Ltd, vol. 7(3), pages 232-251.
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    More about this item

    Keywords

    agency problems; corporate governance; choice of auditors; emerging markets;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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