A.K.M. Waresul Karim

Ownership Structure and Corporate Performance: Evidence from Bangladesh

This paper models the corporate ownership and performance relationship in Bangladesh listed firms using a simultaneous equations approach. Consistent with contemporary literature a “reverse-way” causality relationship between the two is documented. Using an unbalanced pooled sample of 660 firm-years, our results suggest that ownership does not have a significant impact on performance (Tobins Q or ROA). However, performance does appear to have a significant negative impact on ownership. With few exceptions, other governance and control variables appear to have significant effects on both performance and ownership. These results imply that despite significant governance differences between Bangladesh and developed market economies there are strong similarities in “internal governance mechanisms” and the implications of agency theory.

Regulatory Change and the Quality of Compliance to Mandatory Disclosure Requirements: Evidence from Bangladesh

This study investigates the effectiveness of changes in the regulatory environment on the quality of compliance to mandatory disclosure requirements in Bangladesh. Statistical analysis of the Mandatory Disclosure Index, as developed in this paper using annual reports of the exchange-listed firms pre and post changes in the regulatory environment, shows a significant improvement in the quality of compliance during the more regulated time period. The size of the firm, the qualification of its accounting staff that prepares financial statements and the reputation of its auditing firm have significant positive impact on the quality of compliance. The analysis points to two additional important findings: lack of a firms profitability does not seem to affect the quality of its compliance, and the performance of domestic firms are at par with foreign affiliated firms as far as the quality of the compliance is concerned. The findings reported in the present study lend support to the conventional notion that well packaged and timed regulations can foster sustainable development in the overall reporting environment of a country.

Impact of board ownership, CEO-Chair duality and foreign equity participation on auditor quality choice of IPO companies: Evidence from an emerging market

Purpose - The purpose of this paper is to examine the impact of corporate governance on auditor quality choice by IPO companies in an emerging market setting. It seeks to identify whether efficiency or opportunism is the driving force behind the choice of auditors in Bangladeshi firms going public. We try to see whether ownership concentration in the hands of a owner-CEO wins over foreign shareholders in the contest of ensuring financial reporting quality. Design/methodology/approach - Multivariate analysis has been carried out on all IPOs made during 1990 to 2005 whose financial statements were available. Logistic regression tool has been used to identify clients corporate governance attributes affect their choice of auditors. In total, three corporate governance attributes – CEO-Chair duality, retained ownership, and foreign equity participation – were used to test the impact of ownership structure on auditor choice. Findings - Our findings from logistic regression suggest that CEO-Chair duality and the degree of foreign equity participation are significant determinants of auditor choice while proportion of board ownership is not. In addition, issuer size and whether the issuer is a green field operation also influence auditor choice while the length of a firms operating history does not seem to matter. The findings support agency theory prediction that (at least one category of) principals (foreign shareholders in this case), are likely to trade-off higher monitoring costs (of hiring a higher quality auditor) with agency costs arising from asymmetric information, primarily borne by absentee owners. Originality/value - The work is based on empirical data directly from company financial statements. It uses audited financial statements and makes objective analysis of auditor choice dynamics in a frontier market that demonstrated significant growth of IPO activity in recent years.

Audit Pricing, Audit Concentration, and Big-4 Premium in Bangladesh

This paper reports the findings of a comprehensive study of the audit services market of an emerging market economy, namely, Bangladesh. It covers four important aspects of auditing in the country. They are (i) audit concentration; (ii) audit fee trends; (iii) big-four premium; and (iv) audit pricing. Using both conventional and innovative measures of audit concentration, it shows that unlike the market structures commonly found in most developed and many developing country settings, the big-four affiliated audit firms (equivalent to the big-four in countries where big-four firms operate in their own names) do not enjoy significant market power in Bangladesh. They are responsible for auditing only 16.4 percent of listed companies. Their market share ranges from 17.6 percent to 56.1 percent depending on the measure of market share used. This lack of dominant market power might have inhibited their ability to charge fee premia as reflected in their average audit fee standardized by client size. The second issue examined in this paper is the trends in audit fees. The paper reports that while audit fee is apparently increasing in absolute terms, it is indeed declining in relation to growth in client size (i.e., value audited) and also in terms of the purchasing power of the local currency. The third issue analyzed in this paper is whether the big-four affiliated firms in Bangladesh charge any fee premia from their audit clients. Interestingly, although the big-four affiliated firms appear to receive higher average audit fees per client, an in-depth look at their audit fee levels reveals that they actually receive lower average audit fees per unit of client sales or client assets. However, when audit fees are standardized for natural logs of client sales and assets, big-four audit fees are found to be marginally higher than those charged by their non-big counterparts. Finally, the paper revisits audit fee models developed on emerging market economies by Simon et al (1986), Karim and Moizer (1996), Simon (1997) and Ahmed and Goyal (2005) etc.

Board Ethics and Auditor Choice – International Evidence

This study examines the effect of board ethics and board size on firms’ choice of external auditor. Using a large sample of 132,853 firm year observations from forty-six countries around the globe, we find that the level of board ethics in the firm’s country of domicile has a positive impact on the likelihood of choice of a Big 4 audit firm. However, we also find that increasing level of board ethics moderates the impact of board size on the likelihood of choice a Big 4 audit firm. These results establish, through the firm’s choice of auditor, an indirect link between the level of board ethics in the firm’s country of domicile and financial reporting quality.

Impact of Retained Ownership, CEO-Chair Duality, and Foreign Equity Participation on Auditor Choice of IPO Firms: Evidence from an Emerging Market

In this paper we study the impact of corporate governance characteristics on IPO firms’ auditor choice in an emerging market setting. We use three corporate governance attributes – CEO-Chair duality, retained ownership, and foreign equity participation to test the impact of ownership structure on auditor choice of 129 Bangladeshi firms that went public during the period 1990 to 2005. Our findings from logistic regression suggest that CEO-Chair duality and the degree of foreign equity participation are significant determinants of auditor choice while proportion of board ownership is not. In addition, issuer size and whether the issuer is a green field operation also influence auditor choice while the length of a firm’s operating history does not seem to matter. Our findings support agency theory prediction that (at least one category of) principals (foreign shareholders in this case), are likely to trade-off higher monitoring costs (of hiring a higher quality auditor) with agency costs arising from asymmetric information, primarily borne by absentee owners. It also supports the signaling role managers of green field operations play by hiring higher quality auditors to mitigate the uncertainties associated with their offerings.

Value Relevance of Corporate Donations

Abstract This paper examines whether corporate donations, a form of CSR activity, have a positive impact on firm value. The impact of donations on value may suffer from agency problems or poor quality in the choice of donee. However, we expect that, on balance, donations would have a positive impact on value. We use a sample of 52,199 firm-year observations from 42 countries for the period 1998 to 2014 and conduct our tests using the Collins et al. (1999) adaptation of the Ohlson (1995) model. Our evidence supports our expectation that corporate donations have a positive impact on firm value. We also find that CSR performance, and the country level variables for culture and corruption, moderate the contribution to value. Our results are robust to several sensitivity tests including an alternative measure of donations, additional country-level control variables, and variation in the study sample.

Clients’ Corporate Governance Characteristics and Auditor Choice in Emerging Audit Services Markets: The Case of Bangladesh

This paper explores the relationship between selected corporate governance attributes and auditor choice behaviour in a developing country setting. Results of four auditor choice models suggest that client size and growth opportunities significantly explain auditor choice. Sponsor shareholding, institutional shareholding, and the presence of audit committees also have significant influence on auditor choice in some but not all the models. The big-four affiliated audit firms do not enjoy significant market power. They are responsible for auditing only 17.1 percent of listed companies. Their market share ranges from 17.1 percent to 56.1 percent depending on the measure of market share used.