Effiezal Aswadi Abdul Wahab

Institutional investors, political connection and audit quality in Malaysia

Purpose - The purpose of this paper is to extend the audit pricing literature by examining whether institutional investors and political connection are associated with higher audit fees. Design/methodology/approach - Both descriptive and multivariate analyses are employed to address the research objectives. In addition, the authors use panel data to control for both heterocedasticity and contemporaneous correlations in each cross-section. Findings - Based on a panel analysis of 390 Malaysian firms from 1999 to 2003, a positive relationship between institutional ownership and audit fees is found, although the economic impact is minimal. Further, the authors find that audit fees are higher for politically connected firms. Research limitations/implications - A thorough examination on the role of political connection is much warranted to provide a better understanding on such connection influences the audit market. Originality/value - This paper provides an alternative view on the role of political connection, and on how they influence the audit market.

Political connections, corporate governance and audit fees in Malaysia

Purpose - The purpose of this paper is to examine the relationship between political connection, corporate governance and audit fees in Malaysia. Specifically, it is argued that politically connected firms are perceived to be riskier and thus require auditors to undertake greater audit efforts which in turn lead to higher audit fee. Furthermore, it is also hypothesised that the demand for better corporate governance practices requires more audit effort exert from the auditors, and the demand for higher quality work is expected to be stronger for politically connected firms as these firms are being perceived to have higher risks. This is turn results in higher fees paid to the external auditor. Design/methodology/approach - This paper employs panel regression analysis. The panel data set consists of 382 non-financial firms (1,022 observations) for three years from year 2001 to 2003. Findings - Based on 1,022 firm-year observations for the period of 2001 to 2003, the results reveal that politically connected firms pay higher audit fees, while firms with better governance demand a higher audit quality, leading to higher audit fees. However, there is no evidence to support that corporate governance demands for a higher quality audit especially for politically connected firms. Originality/value - This paper contributes to the corporate governance-audit fees literature by examining a large number of corporate governance variables based on the Malaysian Code on Corporate Governance. In particular, instead of using several individual governance variables such as audit committee, board structure or composition, this study condensed the large number of corporate governance variables into a single index. Furthermore, this study was conducted in Malaysia, which is a unique environment that offers clear identifiable segments based along ethnic line, whereby, politically favoured firms are generally given special privileges by the government.

Does Corporate Governance Matter? Evidence from Related Party Transactions in Malaysia

This chapter investigates the relationship between related party transactions (RPTs), corporate governance, and firm performance. Specifically, this chapters examines the moderating effect of corporate governance on the RPTs–performance relationship. On the basis of 448 firm-year sample for 2005–2007, we find evidence that related transactions are detrimental to shareholders and thus reducing firm performance. However, the negative effect is mitigated with the presence of good governance, namely level of board independence and executive remuneration. Furthermore, we find auditor size as an external governance mechanism could also reduce the negative impact of RPTs.

Institutional Investors and Director Remuneration: Do Political Connections Matter?

This study examines the relationship between institutional investors and director remuneration in Malaysia against an important institutional backdrop of political connection. Our panel analysis of 434 firms from 1999 to 2003 finds a negative relationship between institutional ownership and director remuneration suggesting the effectiveness of institutional monitoring. Although we find no evidence to suggest a politically determined remuneration scheme, the negative relationship between institutional ownership and remuneration becomes less in politically connected firms. This suggests that political connections mitigate institutional monitoring in relationship-based economies.

Culture, corporate governance and analysts forecast in Malaysia

Purpose - – The purpose of this paper is to examine the relationship between Bumiputra (in reference to Malay indigenous race) directors, a proxy for culture and analysts forecast. In addition, the study investigates whether corporate governance affects that relationship. Design/methodology/approach - – The sample of this study is based on 664 firm-year observations from 193 firms during the 1999-2009 periods. The authors employ a panel least square regression with both period and industry fixed effects. The authors retrieved of analyst data from the Institutional Broker Estimate System (I/B/E/S) database while the authors hand collected the corporate governance variables. The remaining data were collected from Compustat Global. Findings - – The authors find a positive relationship between the proxy of culture, Bumiputra directors and analysts forecast error suggesting that cultural values influences the level of information in the Malaysian capital market. Research limitations/implications - – The research is dependent on the data availability from I/B/E/S database. Originality/value - – The authors extend the work of Haniffa and Cooke (2002) in investigating how cultural values influence the capital market. In addition, this is the first study that investigates culture values and the analysts forecast.

Political connections, institutional investors and dividend payouts in Malaysia

Purpose The purpose of this study is to examine the agency problem of expropriation using dividends in politically connected firms and the relevance of institutional investors in limiting this problem. The growing presence of this group of shareholders offers a unique opportunity to test their importance in the context of dividends payments and expropriation. Design/methodology/approach This study uses the Tobit regression to test the association between political connection, institutional investors and dividend payouts. The results are also robust to the three-stage-least squares regressions method. Findings The study is based on a random sample of 2,458 Malaysian firms-year observations for the period of 2004-2009. The results reveal that politically connected firms have an inclination to pay lower dividends, while institutional ownership is associated with higher dividend payouts. Furthermore, the findings reveal that higher levels of institutional ownership moderates the negative relationship between politically connected firms and dividends. Research implications The findings have an important implication to regulators as it suggests that the institutional investors can influence the dividend payouts in politically connected firms through active monitoring, thus alleviating agency problems. This also provides a positive feedback on the regulators’ governance initiatives that quest to strengthen the roles of institutional investors. Originality/value This study is the first to examine the effectiveness of the monitoring role of institutional investors in the context of expropriation by politically connected firms from the perspective of dividend payouts.

Political Connections: A Threat to Auditor Independence?

This study examines whether political connections further impair auditor independence by investigating the relationship between non-audit fees and audit fees and as to whether political connections moderate such relationship. This study is conducted in Malaysia, which provides a unique institutional environment with the existence of political connections that is built on ethnic grounds. As both politically connected firms and the proportion of Bumiputras directors on the board are used as proxies for political connections and ethnicity, we find a positive and significant relationship between non-audit fees and audit fees, for which the relationship becomes weaker for Bumiputra-dominated firms. Nonetheless, the results suggest that political connections could pose a threat to auditor independence in both appearance and in mind.

Corporate Governance and Earnings Conservatism in Malaysia

Purpose - This paper investigate whether the revised Malaysian Code on Corporate Governance in 2007 enhances earnings conservatism. In addition, we examine the relationship between board of directors’ expertise and conservatism. Our third objective is to investigate the relationship between audit committee characteristics and earnings conservatism. - Design/methodology/approach The sample of this study is based on 3183 firm-year observations for a period of 2004 to 2009. We hand collected the corporate governance variables while the remaining data was extracted from Compustat Global. We used two measures of conservatism. The first is the market-based model by Basu’s (1997) while the second measure the accrual-based measure by Ball and Shivakumar (2005). - - Findings We find the revision of Malaysian Code on Corporate Governance 2007 result in improve earnings conservatism. We find two audit committee characteristics which are audit committee financial expertise and independence increase earnings conservatism after 2007. However, we could not find support whether board financial expertise mix affect conservatism. - Research limitations/implications This study did not consider other possible corporate governance variables that could influence earnings conservatism since it would be difficult task to gather them. - Originality/value We provide evidence on the role of corporate governance and earnings conservatism in Malaysia.

Political connections, corporate governance, and tax aggressiveness in Malaysia

Purpose - The purpose of this paper is to examine the relationship between political connections and corporate tax aggressiveness in Malaysia. In addition, this paper investigates the relationship between corporate governance variables and corporate tax aggressiveness. Next, the study investigates the mitigating role of corporate governance in the relationship between political connections and corporate tax aggressiveness. Design/methodology/approach - The sample of this study is based on 2,538 firm-year observations during the 2000-2009 periods. This study employs a panel least square regression with both period and industry fixed effects. The study retrieved the corporate governance variables from the downloaded annual reports, whilst the remaining data were collected from Compustat Global. Findings - This study finds that politically connected firms are more tax aggressive than non-connected firms. Furthermore, the study finds that large board size decreases the likelihood of tax aggressiveness and a non-linear relationship exists between institutional ownership and tax aggressiveness suggesting increase in monitoring as the ownership increases. However, the study finds no evidence to suggest that corporate governance mitigates the influence of political connections in promoting tax aggressiveness behavior. The findings suggest that the impact of political connections could outweigh the benefits of changes in corporate governance in Malaysia. Research limitations/implications - The data are not recent, but it reflects a rather longitudinal research period. Originality/value - This paper extends the literature of tax research in Malaysia which is in its’ infancy stage. Furthermore, it investigates the role of political connections in tax-planning research.

Political connections, fees paid to auditors and auditor independence in Malaysia: evidence from going concern audit opinions

This study examines whether auditor independence will be affected by the magnitude of audit and non-audit services fees provided to audit clients and political connections. We predict that auditor independence will be undermined when audit firms provide non-audit services to the audit clients as the provision of the non-audit services to audit clients increases the economic bond between the audit firm and the client. Furthermore, given the unique institutional background in Malaysia, we also test the relationship between auditor independence and political connections. We use the propensity to issue a going concern opinion as a proxy for auditor independence while political connections are represented by two measures namely the proportion of Bumiputras directors on the board and politically connected firms. Contrary to our prediction, we do not observe any association between the propensity to issue going concern opinions and non-audit fees, total fees and the ratio of non-audit fees to total fees. Interestingly, we find evidence to suggest that audit firms are less likely to issue going concern opinions when audit clients have more Bumiputras directors sitting on board. This result is view to be important as it suggests that political connections could undermine auditor independence in fact and appearance.