Norman Mohd-Saleh

The Effect of Free Cash Flow Agency Problem on the Value Relevance of Earnings and Book Value

Prior research identifies free cash flow (FCF) as one source of agency problems between managers and shareholders. Managers of firms with high FCF and of low growth opportunity tend to invest in marginal or even negative NPV project and use income increasing discretionary accruals to camouflage the effects of non‐wealth‐maximizing investments. Therefore, the objective of this study is to assess the value relevance of earnings and book value and the effect of agency problem caused by FCF, on the value relevance of earnings and book value. As predicted, results show that earnings and book value are value relevant and agency problem caused by FCF, reduces the value relevance of earnings and book value. However, the effect is not stable across sample years Firms with FCF agency problem do not have lower earnings (book value) coefficient than other firms in year 2002 (2004). Investigation into specific event that may have driven the difference in result is subject to further research.

Firm size, disclosure and cost of equity capital

Purpose - Prior studies argue that larger firms could get more net benefit from higher disclosure compared to smaller firms due to economies of scale (lower relative costs to produce) and lower proprietary cost (risk of information disclosed being used by competitor). However, this has not been empirically tested. Thus, the purpose of this study is to provide a formal test on whether larger firms benefit more from higher disclosure compared to the smaller firms. Design/methodology/approach - In prior studies, size is included as a control variable because it has been found to influence cost of equity capital. However, this study treats firm size as a moderating variable to the relationship between disclosure and cost of equity capital. The sample comprises 460 firms listed under the Main Board of Bursa Malaysia. Findings - The result shows that there is a significant negative relationship between disclosure and cost of equity capital for large firms and not significant for small firms. The managers of firms could strategize the firms disclosure policy by taking into consideration that the benefit of disclosure in reducing the cost of equity may depend on the size of the firms. Originality/value - This is the first study that investigates the effect of size on the disclosure and cost of equity relationship. Thus, the evidence can support Diamond and Verrecchias argument that larger firms benefit more from their disclosure policy compared to smaller firms. The nature of the information environment in the Malaysian capital market as well as legal background in Malaysia provides the authors with enough variations in disclosure and cost of equity to investigate this issue.

Accounting choices of distressed firms during debt renegotiation: evidence from Malaysia

Prior economics literature suggests that managers of distressed firms have incentives to opportunistically misrepresent performance in debt renegotiation because creditors suffer from an asymmetric information problem. This paper examines the assets write-off behaviour of Malaysian firms during debt renegotiation with lenders, following actual default in loan payment. This investigation is undertaken in the context of high government intervention and a lack of proper accounting standards on intangible and fixed assets write-offs. The results show that firms wrote off more assets in the first year of debt renegotiation with lenders compared with a control of sample of firms that were not involved in debt renegotiation. This result is robust after controlling for performance, audit qualification, audit quality, management changes, size and leverage in multivariate regression models. However, we find limited support that the firms undertaking renegotiation under government supervision write off assets more than the firms without government supervision.

Firm performance, CEO tenure and corporate governance reporting in Malaysia

The current study examines the relationship between chief executive officer (CEO) tenure, firm performance and corporate governance reporting (CGR) for the period 2002–2005. The sample comprises 76 large public firms listed in Bursa Malaysia (304 firm–year observations). Results demonstrate that performance is negatively related to CGR. Subsequent analysis suggests that firms with shorter–tenured CEOs disclose more information about corporate governance practices than those with longer–tenured CEOs. Evidence suggests that new managers disclose more information to convince shareholders monitoring through corporate governance mechanisms are in place to justify their positions in the firms when firm performance is weak.

The influence of family and government-controlled firms on goodwill impairment

Purpose – The purpose of this paper is to examine the effect of ownership structure on the goodwill impairment policy of Malaysian listed firms. In particular, the authors test whether the direction and magnitude of goodwill impairment are related to whether firms are government or family controlled firms. Given the highly concentrated ownership of firms in Malaysia, the authors suggest that the “entrenchment effect” will take precedence over the “alignment effect”, which will be reflected in the accounting policy on goodwill valuation and impairment. Design/methodology/approach – This study utilizes logistic and Tobit regressions to test the prediction, controlling for a range of factors that might affect the goodwill impairment decision. The data were manually collected through 579 firm-year observations from the financial reports of companies listed on the Bursa Malaysia web site for the period 2003-2009. Findings – The authors find that family controlled firms are more likely to record goodwill impair...

Auditor switching and audit fee discounting: the Iranian experience

Purpose - The purpose of this paper is to examine the impact of auditor switching on audit fee discounting in Iran. The increased competition in the Iranian audit market following audit market liberalization in 2001 has resulted in a rapid increase in auditor switching and reduces the relative bargaining power of auditors compared to the clients. It is expected that auditor switching results in fee discounting because the relative bargaining power of an auditor (client) is likely to be at the minimum (maximum) point during the initial period of engagement. Since the increased bargaining power of a client in initial year seems to be different in the case of different type of auditor switching (from a state auditor to a private and from a private auditor to another), the magnitude of fee discounting is expected to be different. Design/methodology/approach - The objective is tested using a sample of 1,022 firm-year observations between 2001 and 2010. This study applies the multivariate regression model using the first difference specification of audit fee as a dependent variable. Findings - Multivariate analysis reveals that auditor switching results in 14 percent of fee discounting. In addition, the results show that 18 and 13 percent of fees discounting during the initial year of engagement arise from cases of auditor switching involving a change from state auditors to private auditors, and a change from one private auditor to another, respectively. The findings support bargaining power view explanation in relation to audit fees discounting in initial year engagement. Originality/value - This study is the first to examine the impact of auditor switching (and analyzed different types of auditor switching) on audit fee discounting using the bargaining power view.