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Corporate Governance, Legal Environment, and Auditor Choice in Emerging Markets

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Listed:
  • Mahmud Hossain

    (Division of Accounting, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore)

  • Chee Yeow Lim

    (School of Accountancy, Singapore Management University, Singapore)

  • Patricia Mui Siang Tan

    (Division of Accounting, Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore)

Abstract

In this study, we examine the effect of firm-level governance on the firm's choice of an external auditor. Further, we test how the relation between corporate governance and auditor choice may be affected by the strength of legal environment. The results show that firm-level governance scores are positively related to the firm's auditor choice. This association is strengthened by country-level legal protection. Specifically, the positive association between auditor choice and the firm-level governance scores is weaker (stronger) in a low (high) legal environment. These findings are robust after controlling for determinants that were found to be significant in earlier research. Overall, our results suggest that the benefits arising from the employment of high-quality auditors are likely to be greater when legal environment is stronger because both auditors and firms are subject to more severe legal punishments for opportunistic behavior.

Suggested Citation

  • Mahmud Hossain & Chee Yeow Lim & Patricia Mui Siang Tan, 2010. "Corporate Governance, Legal Environment, and Auditor Choice in Emerging Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(01), pages 91-126.
    • Handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:01:n:s0219091510001883
    DOI: 10.1142/S0219091510001883
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    References listed on IDEAS

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    1. Doidge, Craig & Andrew Karolyi, G. & Stulz, Rene M., 2007. "Why do countries matter so much for corporate governance?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 1-39, October.
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    Cited by:

    1. Ola Nilsson, 2018. "The relationship between shareholder protection through regulation and the demand for external auditor services," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 15(3), pages 162-175, August.
    2. Nurah Musa Al-Lozi, 2017. "The Impact of Corporate Governance on Auditor Selection: An Empirical Study on Service Companies in Jordan," Journal of Social Sciences (COES&RJ-JSS), , vol. 6(4), pages 886-901, October.
    3. Reiner Quick & Niklas Schenk & Florian Schmidt & Thilo Towara, 2018. "The impact of corporate governance on auditor choice: evidence from Germany," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 251-283, June.

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    More about this item

    Keywords

    Auditor choice; corporate governance; emerging markets; legal environment; investor protection;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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