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

Mahmud Hossain (), Chee Yeow Lim () and Patricia Mui Siang Tan ()
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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

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2010, vol. 13, issue 01, 91-126

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.

Keywords: Auditor choice; corporate governance; emerging markets; legal environment; investor protection (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219091510001883

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