This paper examines the governance role of banks in replacement of underperforming CEOs in firms listed on Chinese stock exchanges. Under most circumstances, the findings suggest that the presence of outstanding loans does not increase the probability that a poorly performing CEO will be forced out and replaced. However, there is a positive and significant effect if the under-performing firm relies heavily on secured and short-term bank lending. Bank loans increase the likelihood of a forced CEO turnover in private firms, especially where joint-equity banks serve as the main lenders to the firm. There is no similar increase in the probability of a CEO turnover for state-owned firms or firms that borrow mainly from state-owned banks. Thus, where state ownership of banks and listed firms implies inefficiency or reluctance on monitoring borrower performance, there is an opportunity to improve loan contract arrangements to improve the mon-itoring role of lending banks.
{"title":"Banks as Corporate Monitors: Evidence from CEO Turnovers in China","authors":"Qing He, Jiyuan Huang, Dongxu Li, Liping Lu","doi":"10.2139/ssrn.2914040","DOIUrl":"https://doi.org/10.2139/ssrn.2914040","url":null,"abstract":"This paper examines the governance role of banks in replacement of underperforming CEOs in firms listed on Chinese stock exchanges. Under most circumstances, the findings suggest that the presence of outstanding loans does not increase the probability that a poorly performing CEO will be forced out and replaced. However, there is a positive and significant effect if the under-performing firm relies heavily on secured and short-term bank lending. Bank loans increase the likelihood of a forced CEO turnover in private firms, especially where joint-equity banks serve as the main lenders to the firm. There is no similar increase in the probability of a CEO turnover for state-owned firms or firms that borrow mainly from state-owned banks. Thus, where state ownership of banks and listed firms implies inefficiency or reluctance on monitoring borrower performance, there is an opportunity to improve loan contract arrangements to improve the mon-itoring role of lending banks.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123149318","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Several corporate scandals are related to lack of concerning stakeholders’ interest. The voice of enhancing stakeholders’ engagement in corporate governance framework is increasing. The paper is aimed to determine the pragmatic and applicable one-tier and two-tier board models for integrating stakeholders as board directors in multinational corporations. It begins with discussing why multinational corporations need to concern on stakeholders’ interest and analysing different theoretical approaches for linking board composition with financial performance and corporate social performance. It will then review corporate governance frameworks integrating stakeholders’ engagement in various jurisdictions and economic status (i.e. emerging markets and developed markets). Finally, pragmatic multi-stakeholder board models for one-tier and two-tier board structures will be proposed through defining board composition, CEO duality and mechanism to resolve disputes arise from board members.
{"title":"Establishing a Multi-Stakeholder Board for Multinational Corporations","authors":"Hugo Chu","doi":"10.2139/ssrn.2906576","DOIUrl":"https://doi.org/10.2139/ssrn.2906576","url":null,"abstract":"Several corporate scandals are related to lack of concerning stakeholders’ interest. The voice of enhancing stakeholders’ engagement in corporate governance framework is increasing. The paper is aimed to determine the pragmatic and applicable one-tier and two-tier board models for integrating stakeholders as board directors in multinational corporations. It begins with discussing why multinational corporations need to concern on stakeholders’ interest and analysing different theoretical approaches for linking board composition with financial performance and corporate social performance. It will then review corporate governance frameworks integrating stakeholders’ engagement in various jurisdictions and economic status (i.e. emerging markets and developed markets). Finally, pragmatic multi-stakeholder board models for one-tier and two-tier board structures will be proposed through defining board composition, CEO duality and mechanism to resolve disputes arise from board members.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121225982","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jihun Bae, Robin Litjens, Chul W. Park, Yachang Zeng
The business media disseminates managers’ earnings guidance news more broadly or creates new information content on the guidance (Drake et al. 2014). We hypothesize that the media’s information dissemination encourages managers to continue issuing earnings guidance because their intended messages in earnings guidance can be transmitted more broadly and free of cost to managers. We also hypothesize that the media’s information creation induces managers to stop issuing earnings guidance because the media might interfere with managers’ intended guidance outcomes. Using a comprehensive dataset of media articles covering management guidance from 2007 to 2012, we find evidence supporting these hypotheses. Additionally, we find evidence that the negative impact of the media’s information creation on future guidance issuance is amplified with bad news guidance and attenuated with high analyst following. Our findings provide fresh insight into the information flow in financial markets by documenting not only positive but also negative influences that the media, through its dual roles, exerts on managers’ guidance behavior.
商业媒体更广泛地传播管理者的盈余指导新闻或在指导上创造新的信息内容(Drake et al. 2014)。我们假设，媒体的信息传播鼓励管理者继续发布盈余指引，因为它们在盈余指引中的预期信息可以更广泛地、免费地传递给管理者。我们还假设媒体的信息创造导致管理者停止发布盈余指导，因为媒体可能会干扰管理者预期的指导结果。利用2007年至2012年管理指导的媒体文章的综合数据集，我们找到了支持这些假设的证据。此外，我们发现有证据表明，媒体信息创造对未来指导发布的负面影响在坏消息指导下被放大，在分析师关注度高的情况下被减弱。我们的研究结果通过记录媒体通过其双重角色对管理者的指导行为施加的积极和消极影响，为金融市场的信息流提供了新的见解。
{"title":"Media Coverage and Management Earnings Guidance","authors":"Jihun Bae, Robin Litjens, Chul W. Park, Yachang Zeng","doi":"10.2139/ssrn.2882405","DOIUrl":"https://doi.org/10.2139/ssrn.2882405","url":null,"abstract":"The business media disseminates managers’ earnings guidance news more broadly or creates new information content on the guidance (Drake et al. 2014). We hypothesize that the media’s information dissemination encourages managers to continue issuing earnings guidance because their intended messages in earnings guidance can be transmitted more broadly and free of cost to managers. We also hypothesize that the media’s information creation induces managers to stop issuing earnings guidance because the media might interfere with managers’ intended guidance outcomes. Using a comprehensive dataset of media articles covering management guidance from 2007 to 2012, we find evidence supporting these hypotheses. Additionally, we find evidence that the negative impact of the media’s information creation on future guidance issuance is amplified with bad news guidance and attenuated with high analyst following. Our findings provide fresh insight into the information flow in financial markets by documenting not only positive but also negative influences that the media, through its dual roles, exerts on managers’ guidance behavior.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"156 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120872682","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In order to better differentiate the drivers of corporations' actions, in particular shareholder wealth and stakeholder interests, the paper explores the significance of the comply or explain-principle and its underlying enforcement mechanisms more generally. Against this background, compliance rates with specific provisions may shed a light on companies' reasons for following the code. An analysis of these rates at the example of distinct provisions of the German Corporate Governance Code is therefore entered into. In light of the current corporate governance debate and the legitimacy problems that are raised, among the code provisions that exemplify these questions very well are those regulating incentive pay, severance pay caps, and age limits for supervisory board members. Their analysis will lay a basis for an answer to the question about what motivates companies to comply with the code. The motivation then paves the way to arrive at a further specification of the determinants of the regulatory evolution of the Code and the range of stakeholders and their concerns that enter into it.
{"title":"Shareholder Wealth vs. Stakeholder Interests? Evidence from Code Compliance Under the German Corporate Governance Code","authors":"Brigitte Haar","doi":"10.2139/ssrn.2875275","DOIUrl":"https://doi.org/10.2139/ssrn.2875275","url":null,"abstract":"In order to better differentiate the drivers of corporations' actions, in particular shareholder wealth and stakeholder interests, the paper explores the significance of the comply or explain-principle and its underlying enforcement mechanisms more generally. Against this background, compliance rates with specific provisions may shed a light on companies' reasons for following the code. An analysis of these rates at the example of distinct provisions of the German Corporate Governance Code is therefore entered into. In light of the current corporate governance debate and the legitimacy problems that are raised, among the code provisions that exemplify these questions very well are those regulating incentive pay, severance pay caps, and age limits for supervisory board members. Their analysis will lay a basis for an answer to the question about what motivates companies to comply with the code. The motivation then paves the way to arrive at a further specification of the determinants of the regulatory evolution of the Code and the range of stakeholders and their concerns that enter into it.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"10 3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121497435","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Acceptance of deposits and maintenance of accounts is the chief function of banks. The banks are free to devise deposit product within the guidelines framed by the Reserve Bank of India. The banks are also bound to follow the instructions on customer service issued by RBI from time to time. There are various types of deposit products offered by banks that are almost similar in nature however with different assigned names.
接受存款和保管帐目是银行的主要职能。这些银行可以在印度央行(Reserve Bank of India)制定的指导方针下，自由设计存款产品。银行还必须遵守印度储备银行不时发布的客户服务指示。银行提供各种各样的存款产品，这些产品性质几乎相似，只是名称不同。
{"title":"Functions of Banks in India","authors":"Y. Kolekar","doi":"10.2139/SSRN.2870557","DOIUrl":"https://doi.org/10.2139/SSRN.2870557","url":null,"abstract":"Acceptance of deposits and maintenance of accounts is the chief function of banks. The banks are free to devise deposit product within the guidelines framed by the Reserve Bank of India. The banks are also bound to follow the instructions on customer service issued by RBI from time to time. There are various types of deposit products offered by banks that are almost similar in nature however with different assigned names.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132642359","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze the role of common equity blockholders in fostering the formation of strategic alliances, establish a positive causal effect of strategic alliances on corporate innovation, and analyze the channels through which strategic alliances foster innovation. Our findings may be summarized as follows. First, there is a positive relation between the fraction of a firm's industry peers with which it shares common blockholders and the number of strategic alliances that it enters into. Second, there is a positive relation between the RD and second, by using an instrumental variables approach. Fifth, we establish that an important channel through which strategic alliances foster greater innovation is through the more efficient redeployment of human capital (inventors) across alliance partners.
{"title":"Innovation beyond Firm Boundaries: Strategic Alliances and Corporate Innovation","authors":"Thomas J. Chemmanur, Yaokan Shen, Jing Xie","doi":"10.2139/ssrn.2668000","DOIUrl":"https://doi.org/10.2139/ssrn.2668000","url":null,"abstract":"We analyze the role of common equity blockholders in fostering the formation of strategic alliances, establish a positive causal effect of strategic alliances on corporate innovation, and analyze the channels through which strategic alliances foster innovation. Our findings may be summarized as follows. First, there is a positive relation between the fraction of a firm's industry peers with which it shares common blockholders and the number of strategic alliances that it enters into. Second, there is a positive relation between the RD and second, by using an instrumental variables approach. Fifth, we establish that an important channel through which strategic alliances foster greater innovation is through the more efficient redeployment of human capital (inventors) across alliance partners.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133399219","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
It is hard to deny that the last two decades have witnessed an ‘audit explosion.’ Increasingly, Supreme Audit Institutions in most counties are allocating greater share of their resources for Performance Auditing of government entities. However, this paper finds that serious academic work examining the methodological foundations of Performance Auditing is conspicuous by its absence in the extant literature on Performance Auditing. Much of the literature on the subject comes from various Supreme Audit Institutions. Academics have either only elaborated on the methodology adopted by these Supreme Audit Institutions or taken issue with the magnitude and direction of the impact of Performance Audit on the performance of government entities. This paper seeks to fill an important void in the literature and argues that the current methodology of performance auditing is fundamentally flawed. Using the well-established principles in financial auditing, it points to the necessity for the existence of a ‘performance statement’ before a Performance Audit can be undertaken. The current practice of auditors making this ‘performance statement’ ex-post violates a well-established norm – the creator of a performance statement cannot be the auditor of the same statement. The paper then goes on to suggest a methodology for developing performance statements and auditing them.
{"title":"Auditing the Auditors: Evaluating the Methodology of Performance Audits","authors":"P. Trivedi","doi":"10.2139/SSRN.2871102","DOIUrl":"https://doi.org/10.2139/SSRN.2871102","url":null,"abstract":"It is hard to deny that the last two decades have witnessed an ‘audit explosion.’ Increasingly, Supreme Audit Institutions in most counties are allocating greater share of their resources for Performance Auditing of government entities. However, this paper finds that serious academic work examining the methodological foundations of Performance Auditing is conspicuous by its absence in the extant literature on Performance Auditing. Much of the literature on the subject comes from various Supreme Audit Institutions. Academics have either only elaborated on the methodology adopted by these Supreme Audit Institutions or taken issue with the magnitude and direction of the impact of Performance Audit on the performance of government entities. This paper seeks to fill an important void in the literature and argues that the current methodology of performance auditing is fundamentally flawed. Using the well-established principles in financial auditing, it points to the necessity for the existence of a ‘performance statement’ before a Performance Audit can be undertaken. The current practice of auditors making this ‘performance statement’ ex-post violates a well-established norm – the creator of a performance statement cannot be the auditor of the same statement. The paper then goes on to suggest a methodology for developing performance statements and auditing them.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"2 2","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113959760","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines whether agency conflicts during venture capital (VC) fundraising impact investment behavior. Using novel investment-level decisions of VCs in the process of raising new funds, we find that venture capitalists take actions hidden from their investors—i.e., limited partners (LPs)—that delay revealing negative information about VC fund performance until after a new fund is raised. After fundraising is complete, write-offs double and reinvestments in relatively worse-off entrepreneurial firms increase. We find that these observations cannot be explained by strategic bundling of news or effort constraints due to the newly raised fund. Funds with both long and short fundraising track record exhibit this behavior and the delay is costly for fund investors (LPs). This strategic delay shows that fundraising incentives have real impacts on VC fund investment decisions, which are often difficult for LPs to observe. The Internet appendix is available at https://doi.org/10.1287/mnsc.2016.2662. This...
{"title":"Managing Performance Signals Through Delay: Evidence from Venture Capital","authors":"Indraneel Chakraborty, M. Ewens","doi":"10.2139/ssrn.2494677","DOIUrl":"https://doi.org/10.2139/ssrn.2494677","url":null,"abstract":"This paper examines whether agency conflicts during venture capital (VC) fundraising impact investment behavior. Using novel investment-level decisions of VCs in the process of raising new funds, we find that venture capitalists take actions hidden from their investors—i.e., limited partners (LPs)—that delay revealing negative information about VC fund performance until after a new fund is raised. After fundraising is complete, write-offs double and reinvestments in relatively worse-off entrepreneurial firms increase. We find that these observations cannot be explained by strategic bundling of news or effort constraints due to the newly raised fund. Funds with both long and short fundraising track record exhibit this behavior and the delay is costly for fund investors (LPs). This strategic delay shows that fundraising incentives have real impacts on VC fund investment decisions, which are often difficult for LPs to observe. The Internet appendix is available at https://doi.org/10.1287/mnsc.2016.2662. This...","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-09-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125608883","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine how venture CEOs effectively engage their boards in the strategy-making process. Using the inductive multiple-case study approach, we track CEO-board interactions inside and outside the boardroom in depth and over time through rare observations of board meetings and rich interview access to CEOs and their boards of directors. Our primary theoretical contributions are to the resource dependence perspective. We clarify the resource v. power tradeoff as a fundamental tension in venture CEO-board relationships. Further, we add a much-needed process framework to resource dependence by highlighting how venture CEOs use 4 behaviors to resolve this tradeoff in an effective strategy-making process. Finally, we contribute a fresh view of the venture CEO-board relationship – i.e., spotlighting the CEO (not board) and boards as CEO-director dyads (not groups). We conclude by noting implications for other key corporate governance perspectives, and indicating boundary conditions for our framework. Overall, we deepen the conversation at the nexus of resource dependence theory and venture governance.
{"title":"Unpacking the CEO-Board Relationship: How Strategy-Making Happens in Entrepreneurial Firms","authors":"Sam Garg, K. Eisenhardt","doi":"10.5465/AMJ.2014.0599","DOIUrl":"https://doi.org/10.5465/AMJ.2014.0599","url":null,"abstract":"We examine how venture CEOs effectively engage their boards in the strategy-making process. Using the inductive multiple-case study approach, we track CEO-board interactions inside and outside the boardroom in depth and over time through rare observations of board meetings and rich interview access to CEOs and their boards of directors. Our primary theoretical contributions are to the resource dependence perspective. We clarify the resource v. power tradeoff as a fundamental tension in venture CEO-board relationships. Further, we add a much-needed process framework to resource dependence by highlighting how venture CEOs use 4 behaviors to resolve this tradeoff in an effective strategy-making process. Finally, we contribute a fresh view of the venture CEO-board relationship – i.e., spotlighting the CEO (not board) and boards as CEO-director dyads (not groups). We conclude by noting implications for other key corporate governance perspectives, and indicating boundary conditions for our framework. Overall, we deepen the conversation at the nexus of resource dependence theory and venture governance.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"239 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133931602","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
J. Coulton, G. Livne, Angela Pettinicchio, Stephen L Taylor
We provide evidence that distinguishes between competing production cost-based explanations of how to interpret unusually high (or low) audit fees and their expected relation with accounting quality. Abnormally high or low fees are typically proxied by the residuals obtained from fee models. Whereas prior research assumes these residuals are independent from one year to the next, we argue that the inherent “stickiness” in audit fee residuals also means that measures of unexpected fees will be serially correlated. Our results strongly support this view, and suggest that audit fee residuals reflect a limitation of the standard audit fee model in capturing attributes of the auditing environment that are not well captured at the client-firm level. However, we also argue that the extent to which residual fees differ from the recent past can clarify their relation to accounting quality. We show that the “jump” in fee residuals relative to their long-run “sticky” average is strongly associated with lower accounting quality. Hence, a “jump” in fee residuals is a suitable proxy for lower accounting quality, as it likely reflects reactive auditor effort and/or an additional risk premium. We then show that long-run fee residuals are also negatively associated with subsequent accounting quality, a result which further contradicts the argument that higher abnormal audit fees capture increased proactive effort and therefore reflect “investments in auditing”. Overall, our results suggest that risk, rather than proactive effort, is a better explanation for higher than expected audit production costs.
{"title":"Abnormal Audit Fees and Accounting Quality","authors":"J. Coulton, G. Livne, Angela Pettinicchio, Stephen L Taylor","doi":"10.2139/ssrn.2826272","DOIUrl":"https://doi.org/10.2139/ssrn.2826272","url":null,"abstract":"We provide evidence that distinguishes between competing production cost-based explanations of how to interpret unusually high (or low) audit fees and their expected relation with accounting quality. Abnormally high or low fees are typically proxied by the residuals obtained from fee models. Whereas prior research assumes these residuals are independent from one year to the next, we argue that the inherent “stickiness” in audit fee residuals also means that measures of unexpected fees will be serially correlated. Our results strongly support this view, and suggest that audit fee residuals reflect a limitation of the standard audit fee model in capturing attributes of the auditing environment that are not well captured at the client-firm level. However, we also argue that the extent to which residual fees differ from the recent past can clarify their relation to accounting quality. We show that the “jump” in fee residuals relative to their long-run “sticky” average is strongly associated with lower accounting quality. Hence, a “jump” in fee residuals is a suitable proxy for lower accounting quality, as it likely reflects reactive auditor effort and/or an additional risk premium. We then show that long-run fee residuals are also negatively associated with subsequent accounting quality, a result which further contradicts the argument that higher abnormal audit fees capture increased proactive effort and therefore reflect “investments in auditing”. Overall, our results suggest that risk, rather than proactive effort, is a better explanation for higher than expected audit production costs.","PeriodicalId":440695,"journal":{"name":"Corporate Governance: Actors & Players eJournal","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115882552","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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