Corporate Governance, Investor Protection, and Auditor Choice in Emerging Markets

• Main Authors: Hossain, Mahmud, LIM, Chee Yeow, TAN, Patricia Mui Siang
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Auditor choice; corporate governance; emerging markets; legal environment; investor protection; Accounting; Business Law, Public Responsibility, and Ethics; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/643; https://ink.library.smu.edu.sg/context/soa_research/article/1642/viewcontent/CorporateGovernance_LegalEnvironment_AuditorChoice_2010.pdf
• Institution: Singapore Management University

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.