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Auditor Choice in Politically Connected Firms

63 Pages Posted: 23 Sep 2010 Last revised: 1 Aug 2013

Omrane Guedhami

University of South Carolina - Moore School of Business

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

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Date Written: July 31, 2013

Abstract

We extend recent research on the links between political connections and financial reporting by examining the role of auditor choice. Our evidence that public firms with political connections are more likely to appoint a Big Four auditor supports the intuition that insiders in these firms are eager to improve accounting transparency to convince outside investors that they refrain from exploiting their connections to divert corporate resources. In evidence consistent with another prediction, we find that this link is stronger for connected firms with ownership structures conducive to insiders seizing private benefits at the expense of minority investors. We also find that the relation between political connections and auditor choice is stronger for firms operating in countries with relatively poor institutional infrastructure, implying that tough external monitoring by Big Four auditors becomes more valuable for preventing diversion in these situations. Finally, we report that connected firms with Big Four auditors exhibit less earnings management and enjoy greater transparency, higher valuations, and cheaper equity financing.

Keywords: Auditor Choice, Political Connection, Corporate Governance

JEL Classification: G32, G34, M41, M42

Suggested Citation

Guedhami, Omrane and Pittman, Jeffrey and Saffar, Walid, Auditor Choice in Politically Connected Firms (July 31, 2013). Available at SSRN: https://ssrn.com/abstract=1681459 or http://dx.doi.org/10.2139/ssrn.1681459

Omrane Guedhami (Contact Author)

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

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