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Does Auditors' Reputation 'Discourage' Related Party Transactions? The French Case

Moez Bennouri (), Mehdi Nekhili () and Philippe Touron
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Philippe Touron: Pôle Finance Responsable - Rouen Business School - Rouen Business School

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Abstract: Regulators, standard setters and market participants consider related party transactions a major problem in financial markets. The quality of external auditing may be proposed as an important governance mechanism to alleviate the propensity of insiders to use related party transactions. We test the prevalence of audit quality to reduce the number of these transactions. We consider that audit quality is positively correlated with audit reputation. We use a unique data set with a sample of 85 French firms over the period 2002-2005. The French legal system allows us to concentrate on the reputation dimension of audit firms, as a motivation that mitigates the propensity of insiders to initiate related-party transactions. The results show that high quality external audit firms reduce significantly the frequency of related-party transactions. The effect of audit quality seems to be the most important variable explaining the frequency of related-party transactions. These results are obtained after controlling for the selection bias related to the choice of external auditors, using a two-step Heckman procedure.

Keywords: Ownership structure; Related party transaction; Audit; Reputation; Corporate governance; Ownership structure. (search for similar items in EconPapers)
Date: 2011-06-12
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00714209
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Published in International Symposium on Audit Research, Jun 2011, Québec, Canada

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Working Paper: Does Auditors' Reputation 'Discourage' Related-Party Transactions? The French Case (2015)
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