Foreign Monitoring and Audit Quality: Evidence from Korea

Sang Cheol Lee, Mooweon Rhee and Jongchul Yoon
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Sang Cheol Lee: College of Business Administration, Dongguk University-Seoul, 30, Pildong-ro 1gil, Jung-gu, Seoul 04620, Korea
Mooweon Rhee: School of Business, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 03722, Korea
Jongchul Yoon: College of Business Administration, Keimyung University, 1095 Dalgubeol-daero, Dalseo-Gu, Daegu 42601, Korea

Sustainability, 2018, vol. 10, issue 9, 1-22

Abstract: This study investigates the effects of both foreign majority shareholders and foreign investors’ participation in the board of directors on audit quality, as reflected by auditor size and audit fees. In addition, the study examines the moderating effect of an agency problem on the relationship between foreign investors and the monitoring of audit quality. Using 1574 non-financial firm-year observations listed on the Korea Stock Exchange from 2000 to 2003, we find that the presence of foreign investors such as foreign block shareholders and foreign outside directors increases audit quality. At the same time, the monitoring role of foreign block shareholders is more powerful than that of foreign external directors. Moreover, the foreign block shareholders in professional management-controlled firms exert a more profound influence on audit quality than do those in owner-controlled ones. These test results imply that foreign investors with independence, expertise, and monitoring incentives could play an important role in improving the corporate governance system in Korea, which in turn would not only enhance firm value, but also strengthen the sustainability of Korean companies.

Keywords: foreign block shareholders; foreign external directors; audit quality; auditor size; audit fees; agency problem (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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