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Family Ownership, Earnings Informativeness, and Role of Audit Committees: An Empirical Investigation in India

Prasanna Krishna (), Ramanathan Geeta and Arora Bharat
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Prasanna Krishna: Department of Management Studies, Indian Institute of Technology ( IIT ), Chennai 600036, INDIA
Ramanathan Geeta: Department of Management Studies, Indian Institute of Technology ( IIT ), Chennai 600036, INDIA
Arora Bharat: Department of Management Studies, Indian Institute of Technology ( IIT ), Chennai 600036, INDIA

Review of Economics & Finance, 2017, vol. 9, 57-70

Abstract: This paper investigates the role and impact of audit committees on the relationship between family ownership and earnings informativeness. The sample set comprises of 368 Indian firms over a period of 6 years (2007-2012) with a panel dataset of 2208 firm-years. Earnings informativeness was measured through the relationship between accounting earnings and cumulative abnormal stock returns (CAR). Audit committee independence has statistically significant positive association with earnings informativeness in India. However, family firms exhibit lower earnings informativeness compared to widely held companies. The finding indicates information asymmetry among family firms despite the presence of audit committees. This finding supports entrenchment effect and affirms the type II agency issues of dominating verses minority shareholders among Indian companies. Hence, protection of minority rights assumes tremendous importance for regulators. Audit committee size had a positive impact on the level of earnings informativeness only in widely held companies. Audit fees had a positive impact, while consulting fees paid to auditors had a negative impact on earnings informativeness. This observation lends support to recent regulations restricting auditor engagement for non-audit services. Broadly, the results support the hypothesis that audit committees strengthen earnings informativeness among Indian family firms. The findings enable cross section of stake holders to appreciate the dynamics among governance mechanisms, concentrated control and their impact on the earnings informativeness.

Keywords: Audit committees; Accounting earnings; Earnings informativeness; Cumulative abnormal returns (search for similar items in EconPapers)
JEL-codes: M41 M48 D53 (search for similar items in EconPapers)
Date: 2017
Note: The authors acknowledge with thanks to the financial support extended by the NSE-IGIDR collaborative forum for this research. The preliminary draft was presented in the research conference organized by NSE-IGIDR in Mumbai on July 10 and 11, 2014. The authors thank Dr. Rajib Doogar, University of Washington, for the constructive review and feedback, and thank Dr. Subrata Sarkar, IGIDR, and Dr.Jayati Sarkar, IGIDR, Mumbai, for their helpful comments.
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