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Corporate Governance, Investor Protection, and Auditor Choice in Emerging Markets
Mahmud Hossain, Nanyang Technological University
Chee Yeow Lim, Nanyang Technological University
Patricia M.S. Tan, Nanyang Technological University
ABSTRACT. In this study, we examine the effect of firm-level governance on the firm’s choice of an external auditor. Further, we test how the relation between corporate governance and auditor choice may be affected by the level of investor protection. The results reveal that firm-level governance scores are positively related to the firm’s auditor choice. However, this finding is weakened by country-level legal protection. That is, the positive association between auditor choice and the firm-level governance scores is weaker (stronger) in a low (high) investor protection environment. These findings are robust after controlling for determinants that were found to be significant in earlier research. Overall, our findings suggest that firms in countries with strong investor protection choose higher quality auditor since both auditors and firms are subject to more severe legal punishments for opportunistic behavior.
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