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

Farooq Omar () and Tabine Sonia ()
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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

Review of Middle East Economics and Finance, 2015, vol. 11, issue 1, 79-97

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.

Keywords: agency problems; corporate governance; choice of auditors; emerging markets (search for similar items in EconPapers)
JEL-codes: G15 G32 G34 G35 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1515/rmeef-2012-0036

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