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Does Audit Oversight Quality Reduce Insolvency Risk, Systematic Risk, and ROA Volatility? The Role of Institutional Ownership

Author

Listed:
  • Rebecca Abraham

    (Huizenga College of Business, Nova Southeastern University, 3301 College Avenue, Davie, FL 33314, USA)

  • Hani El-Chaarani

    (Faculty of Business Administration, Tripoli Campus, Corniche El-Mina, Tripoli 11-5020, Lebanon)

  • Fitim Deari

    (Faculty of Business and Economics, South East European University, 1200 Tetovo, North Macedonia)

Abstract

The board of directors appoints the audit committee to assess the financial performance of the firm. The audit committee uses reports provided by audit firms, such as Form 10Ks, and annual reports to assess firm financial performance. The degree of audit oversight quality is a governance measure, which, if effective, may reduce firm risk. This study measures the effect of three measures of audit oversight quality on insolvency risk, systematic risk, and volatility of return on assets for a sample of U.S. pharmaceutical firms and energy firms from 2010 to 2022. All measures of audit oversight quality reduced firm risk, with the first measure reducing both systematic risk and volatility of return on assets, the second measure reducing systematic risk, and the third measure reducing volatility of return on assets. As institutional ownership is also a governance measure, we tested whether its joint effect with audit oversight quality reduced firm risk. This hypothesis was supported for all three measures of audit oversight quality for systematic risk and for the third audit oversight quality measure for volatility of assets. Robustness was established by replicating the regressions with an alternate governance measure, which yielded similar results. Endogeneity of all audit oversight quality measures was absent due to lack of significance of leverage, firm size, equity multiplier, and firm value in reducing risk through their effect on audit oversight quality.

Suggested Citation

  • Rebecca Abraham & Hani El-Chaarani & Fitim Deari, 2024. "Does Audit Oversight Quality Reduce Insolvency Risk, Systematic Risk, and ROA Volatility? The Role of Institutional Ownership," JRFM, MDPI, vol. 17(8), pages 1-21, August.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:8:p:335-:d:1448193
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    References listed on IDEAS

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    1. 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.
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