Auditor choice in politically connected firms

Omrane Guedhami, Jeffrey A. Pittman, Walid Saffar

Research output: Journal article publicationJournal articleAcademic researchpeer-review

123 Citations (Scopus)

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 4 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 4 auditors becomes more valuable for preventing diversion in these situations. Finally, we report that connected firms with Big 4 auditors exhibit less earnings management and enjoy greater transparency, higher valuations, and cheaper equity financing.
Original languageEnglish
Pages (from-to)107-162
Number of pages56
JournalJournal of Accounting Research
Volume52
Issue number1
DOIs
Publication statusPublished - 1 Mar 2014

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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