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

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2010

Posted: 5 Jul 2010

See all articles by Mahmud Hossain

Mahmud Hossain

Nanyang Technological University (NTU) - Division of Accounting

Chee Yeow Lim

Singapore Management University - School of Accountancy

Patricia M. S. Tan

Nanyang Technological University (NTU) - Division of Accounting

Date Written: March 1, 2010

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

Suggested Citation

Hossain, Mahmud and Lim, Chee Yeow and Tan, Patricia M. S., Corporate Governance, Legal Environment, and Auditor Choice in Emerging Markets (March 1, 2010). Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2010, Available at SSRN: https://ssrn.com/abstract=1632703

Mahmud Hossain (Contact Author)

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
SINGAPORE
+ 65 792 4217 (Fax)

Chee Yeow Lim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Patricia M. S. Tan

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
Singapore

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