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Three Essays on Audit Regulation, Audit Market Structure, and the Quality of Financial Statements

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Three Essays on Audit Regulation, Audit Market Structure, and the Quality of Financial Statements Three Essays on Audit Regulation, Audit Market Structure, and the Quality of Financial Statements Dissertation zur Erlangung des akademischen Grades Doktor der Wirtschaftswissenschaften (Dr. rer. pol) am Fachbereich Wirtschaftswissenschaften der Universität Konstanz Vorgelegt von: Benjamin Heß Tag der mündlichen Prüfung: 09. Juli 2014 1. Referentin: Prof. Dr. Ulrike Stefani 2. Referent: Prof. Dr. Jens Jackwerth Contents Summary ..................................................................................................................... 1 Zusammenfassung .......................................................................................................... 5 Chapter 1: Audit Market Regulation and Supplier Concentration around the World: Empirical Evidence .................................................................... 10 1.1 Motivation ........................................................................................................ 11 1.2 The Regulatory Environment of Statutory Audits and its possible Effects on the Market Structure ............................................................................................... 14 1.3 Supplier Concentration and Competition in the National Audit Markets ........ 27 1.3.1 Sampling .................................................................................................... 27 1.3.2 Measures for Audit Market Concentration and Competition .................... 30 1.3.3 Variables for Audit Regulation and Country-Specific Characteristics ..... 37 1.4 Regression Analysis ......................................................................................... 44 1.4.1 Regression Model ...................................................................................... 44 1.4.2 Results of the Regression Analysis ........................................................... 45 1.4.3 Robustness Checks .................................................................................... 50 1.5 Conclusion ........................................................................................................ 62 1.A Appendix .......................................................................................................... 65 References Chapter 1 ................................................................................................. 77 Chapter 2: Audit Market Regulation and Earnings Characteristics: Cross- Country Evidence on the Role of the Audit Market Structure ........... 89 2.1 Introduction ...................................................................................................... 90 2.2 Background ...................................................................................................... 94 2.3 Earnings Characteristics ................................................................................. 103 2.3.1 Discretionary Accruals ............................................................................ 104 2.3.2 Loss Avoidance ....................................................................................... 105 III Contents 2.3.3 Asymmetric Timeliness ........................................................................... 106 2.4 Data and Research Design .............................................................................. 107 2.4.1 Research Design ...................................................................................... 107 2.4.2 Sample Selection and Descriptive Statistics ........................................... 111 2.5 Results ............................................................................................................ 116 2.5.1 Unconditional Analysis ........................................................................... 116 2.5.2 Analysis conditional on the Market Structure ......................................... 119 2.6 Robustness Checks ......................................................................................... 126 2.7 Conclusion ...................................................................................................... 131 2.A Appendix ........................................................................................................ 133 References Chapter 2 ............................................................................................... 146 Chapter 3: The Effect of the Appointment of Former Audit Firm Employees to the Board of Directors on the Quality of the Financial Reporting ... 154 3.1 Introduction .................................................................................................... 155 3.2 Related Literature ........................................................................................... 157 3.3 Hypotheses ..................................................................................................... 160 3.4 Sampling ......................................................................................................... 164 3.5 Methodology .................................................................................................. 168 3.5.1 Audit Fee Regression Model ................................................................... 168 3.5.2 Discretionary Accruals Regression Model .............................................. 174 3.6 Results ............................................................................................................ 176 3.6.1 Audit Fees and Discretionary Accruals following an Audit Expert Appointment ............................................................................................ 176 3.6.2 Dynamics of Audit Fees and Discretionary Accruals ............................. 180 3.6.3 Influence of the Audit Expert .................................................................. 181 3.7 Robustness Checks ......................................................................................... 183 3.8 Conclusion ...................................................................................................... 188 3.A Appendix ........................................................................................................ 191 IV Contents References Chapter 3 ............................................................................................... 196 Complete References .................................................................................................. 202 Danksagung ................................................................................................................. 223 Abgrenzung ................................................................................................................. 224 V List of Tables Table 1.1: Descriptive statistics - client firms ............................................................ 29 Table 1.2: Correlation coefficients - concentration and competition measures .......... 33 Table 1.3: Concentration and competition measures for each country ....................... 34 Table 1.4: Critical values for the Hirschmann-Herfindahl-index HHI ....................... 35 Table 1.5: Variable description ................................................................................... 41 Table 1.6: Number of countries in which the specific regulations are effective ........ 42 Table 1.7: Descriptive statistics - control variables .................................................... 43 Table 1.8: Regression results for the concentration ratio CR4 and the Hirschmann- Herfindahl-index HHI ............................................................................... 48 Table 1.9: Regression results for the auditor-client-ratio AC_R and the market share mobility measure MOB .............................................................................. 49 Table 1.10: Robustness checks for the concentration ratio CR4 ................................... 53 Table 1.11: Robustness checks for the Hirschmann-Herfindahl-index HHI ................ 55 Table 1.12: Robustness checks for the auditor-client ratio AC_R ................................ 58 Table 1.13: Robustness checks for the mobility share MOB ........................................ 59 Table 1.14: Audit regulations in various countries ....................................................... 65 Table 2.1: Sample selection ...................................................................................... 112 Table 2.2: Descriptive statistics for the county-level variables ................................ 114 Table 2.3: Descriptive statistics for the firm-level variables .................................... 115 Table 2.4: Regression results - unconditional analysis ............................................. 117 Table 2.5: Summary of regression results ................................................................. 119 Table 2.6: Regression results - conditional analysis ................................................. 123 Table 2.7: Robustness checks - different concentration and competition metrics .... 128 Table 2.8: Variable definition ................................................................................... 133 Table 2.9: Full results - earnings management metrics conditional on concentration (CR4) ........................................................................................................ 135 Table 2.10: Full results - earnings management metrics conditional on competition (MOB) ...................................................................................................... 138 Table 2.11: Full results - asymmetric timeliness conditional on CR4 and MOB .......
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