Corporate political connections, agency costs and audit quality

Khan, Arifur, Mihret, Dessalegn Getie and Muttakin, Mohammad 2016, Corporate political connections, agency costs and audit quality, International journal of accounting & information management, vol. 24, no. 4, pp. 357-374, doi: 10.1108/IJAIM-05-2016-0061.

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Title Corporate political connections, agency costs and audit quality
Author(s) Khan, ArifurORCID iD for Khan, Arifur
Mihret, Dessalegn Getie
Muttakin, Mohammad
Journal name International journal of accounting & information management
Volume number 24
Issue number 4
Start page 357
End page 374
Total pages 18
Publisher Emerald
Place of publication Bingley, Eng.
Publication date 2016-11-01
Keyword(s) Bangladesh
audit quality
political connectio
agency cost
Summary Purpose – The effect of political connections of agency costs has attracted considerable research attention due to the increasing recognition of the fact that political connection influences corporate decisions and outcomes. This paper aims to explore the association between corporate political connections and agency cost and examine whether audit quality moderates this association. Design/methodology/approach – A data set of Bangladeshi listed non-financial companies is used. A usable sample of 968 firm-year observations was drawn for the period from 2005 to 2013. Asset utilisation ratio, the interaction of Tobin’s Q and free cash flow and expense ratio are used as alternative proxies for agency costs; membership to Big 4 audit firms or local associates of Big 4 firms is used as a proxy for audit quality. Findings – Results show that politically connected firms exhibit higher agency costs than their unconnected counterparts, and audit quality moderates the relationship between political connection and agency costs. The results of this paper suggest the importance of audit quality to mitigate agency problem in an emerging economic setting. Research limitations/implications – The findings of this paper could be of interest to regulators wishing to focus regulatory effort on significant issues influencing stock market efficiency. The findings could also inform auditors in directing audit effort through a more complete assessment of risk and determining reasonable levels of audit fees. Finally, results could inform financial statement users to direct investments to firms with lower agency costs. Originality/value – To the knowledge of the authors, this study is one of the first to explore the relationship between political connection and agency costs, and the moderating effect of audit quality of this relationship.
Language eng
DOI 10.1108/IJAIM-05-2016-0061
Field of Research 150103 Financial Accounting
Socio Economic Objective 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2016, Emerald
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Accounting
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