Nurul Houqe

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.

Government Quality, the Adoption of IFRS and Auditor Choice: A Cross Country Analysis

We examine the association between country-level government quality and firms’ choice of external auditors. We use a firm’s choice of a Big 4 auditor as a proxy for the demand for high-quality financial reporting. Using a cross-sectional sample of 142,193 firm-year observations from 46 countries over 1998-2007, we show that government quality of a country has a significant positive effect on the likelihood of choosing Big 4 auditors by firms in that country. We also show that firms in countries with strong governments that have adopted the IFRS are more likely to choose Big 4 than non-Big 4 auditors. To our knowledge, this is the first study of its kind to provide direct evidence on the role of government quality in firms’ choice of external auditors. The results provide insights for policy makers on the importance of government quality toward improving financial reporting quality in a country.

Discriminatory Related Party Transactions: A New Measure

Discretionary related party transactions (also known as tunnelling or self-dealing transactions) are non-arms length transactions with related parties of controlling shareholders for private benefit at the cost of other shareholders. Though there are studies on discriminatory related party transactions, there has been limited effort to develop a measure for such discriminatory transactions. Current measures are based on weak theoretical underpinnings and prone to high measurement error. This paper develops and tests a new measure for these discriminatory transactions. Type 1, Type 2 error rates and power of the new measurement are compared with an existing measure using computer simulated and real data. The capital market sensitivity of the new measure is also tested and compared with an existing measure. The new measure is found to be superior. This is the first systematic effort to develop a measure for discriminatory related party transactions. It will contribute in policy-making in relation to discriminatory related party transactions.

Industry and Time Specific? An Examination of Bankruptcy Forecasting

The purpose of this research is to determine whether bankruptcy forecasting models are subject to industry and time specific effects. A sample of 15,848 firms was obtained from the Compustat and CRSP databases, spanning the time period 1950 to 2013, of which 396 were bankrupt. Using five models from the literature, we evaluated whether these effects impacted on the forecasting capability of the models. We found that three of the models demonstrated varying levels of success depending on the decade and industry in question, with Altman being affected significantly. The Zmijewski model outperformed both Altman and Ohlson, and also had the lowest overall change in predictive performance. In addition, based on the results of the older models it appears that the inclusion of market information increases the volatility of model performance.

Corporate Environmental Strategy, Lobby Group Participation and Political Reaction to New Zealand Emissions Trading Bill

This paper aims to investigate the environmental strategy on the choice of a firm’s political reaction in response to a proposed Emissions Trading Scheme (ETS) in New Zealand. Using sample of 33 firms in four industries that are affected by the introduction of the ETS, this study found a contingency relationship between environmental strategy and political reaction. Accordingly, firms adopting a more reactive environmental strategy tend to oppose and dismiss the introduction of an ETS. Additionally, firms that actively participate in different lobby groups are also more likely to dismiss the ETS Bill. A firm’s political reaction is also found to correlate with firm size and industry.