The interactive effect of the auditor's size on the relationship between political connections, financial helplessness and agency costs in the Companies admitted to the Tehran Stock Exchange.

Document Type : Research Paper

Authors

1 Director of Accounting Department of Semnan University of Science and Economics, Iran

2 Faculty Member of Faculty of Economics and Management, Semnan University, Iran

3 Graduate Student, Faculty of Management Economics, Faculty of Semnan, Iran

Abstract

  The aim of this research is to determine interactive effect of the auditor's size on the relationship between political connections, financial crisis and agency costs. Auditors can affect the selection of accounting methods by management and undesirable effects of ownership separation of and management can be diluted by reducing information asymmetry between consumers and suppliers. Top executives and administrators are often considered powerful because they can benefit from a set of benefits. A strong increase in financial confidence can lead to the bankruptcy of a large financial or non - financial institution. It is directly related to mistrust of the government's future policies. The statistical sample of this research consists of 90 companies in the time period of 1388 to 1396. The inferential statistic is based on logit regression, in which the combined data analysis and integration is used. The results of the first hypothesis showed that audit quality has a significant negative effect on the financial crisis of companies. The results of the second hypothesis showed that the effect of mediating the audit quality on the relationship between political connections and agency costs has a significant negative effect. The results of the third hypothesis showed that the effect of the mediating effect of audit quality on the relationship between political connections and financial crisis has no significant effect.
  1- Introduction
The aim this research is to determine the relationship between political connections, financial crisis and agency costs. Auditors can affect the selection of accounting methods by management and undesirable effects of ownership of ownership and management can be diluted by reducing information asymmetry between consumers and suppliers. Top executives and administrators are often considered powerful because they can benefit from a set of benefits. A strong increase in financial confidence can lead to the bankruptcy of a large financial or non - financial institution. It is directly related to mistrust of the government's future policies.
  2- Hypothesis
The aim this research is to determine interactive effect of the auditor's size on the relationship between political connections, financial crisis and agency costs of the companies listed in Tehran Stock Exchange. Consequently, the following hypotheses are provided: 
H1: Audit quality has a significant effect on the financial crisis.
H2: Audit quality has a significant effect on the relationship between political connections and agency costs.
H3: Audit quality has a significant effect on the relationship between political connections and financial crisis.
  3- Methods
This is an applied research in terms of purpose and in terms of method, it is descriptive research which is based on log it regression analysis. For data analysis and hypothesis testing, the information required through the audited financial statements has been collected for 90 companies for a period of 9 years (2009 to 2017). For to the final analysis, Eviews software is used.
  4- Results
The results of the first hypothesis showed that audit quality has a significant negative effect on the financial crisis of companies.
The results of the second hypothesis showed that the effect of mediating the audit quality on the relationship between political connections and agency costs has a significant negative effect.
The results of the third hypothesis showed that the effect of the mediating effect of audit quality on the relationship between political connections and financial crisis has no significant effect.
  5- Conclusion
The results showed that, the first hypothesis showed that audit quality has a significant negative effect on the financial crisis of companies. Hence, auditors' role in helping investors in conscious decision making and enhancing the cohesion of financial markets is important. Lawmakers around the world have always been trying to improve the audit quality carried out by the auditors. The confidence of investors and creditors depends on the audit quality. As a result, the higher the audit quality, the more investors and creditors are willing to invest more and give more credit and take the company away from the financial crisis.
The results of the second hypothesis showed that the effect of mediating the audit quality on the relationship between political connections and agency costs has a significant negative effect. By increasing the audit quality, conflicts arising from the separation of ownership and management are reduced. As a result, the agency costs are reduced.
The results of the third hypothesis of research at 95 % confidence level showed that there is no significant relationship between the mediating quality of auditing on the relationship between political relations and financial crisis. Considering this assumption means that the audit organization has the highest quality. The quality of the audit organization may be less than some other institutions. It is also assumed that other auditing institutions may have higher quality. For this reason, there is no significant relationship between the mediating quality of auditing on the relationship between political connections and financial crisis.  
 
 

Keywords

References

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Boubakri, N., Cossert, J.C., & Saffar, W. (2012). Political connections and the cost of equity capital, Journal of Corporate Finance, 18, 541-559.
Bliss, M.A. & Gul, F.A., (2012). Political connection and cost of debt: Some Malaysian evidence. Journal of Banking and Finance, 36(5):1520–1527
Bushman, R. and J. Piotroski. (2006). Financial Reporting Incentives for Conservative Accounting: The Influence of Legal and Political Institutions. Journal of Accounting & Economics, 42, 107–148.
Darabi, R.(2017). Capital Structure and Financial Crisis Relationship. Quarterly Journal of Fiscal and Economic Policies, 5(17), 51-72. (in Persian)
DeAngelo, L. (1981). Auditor size and auditor quality. Journal of Accounting and Economics, 3, 183-199.
Etemadi, H., Ahmadi Gorji, J. (2017). Investigating the effect of political connection on investment and decrease in financial constrains in listed firms of Tehran Stock Exchange. Journal of Accounting and Auditing Researches, 9(34): 4-23. (in Persian)
Ebrahimi, K., Bahraminasab, A., Mamashli, R. (2017). The Effect of Financial Crisis on the Quality of Financial Reporting. Journal of Accounting Knowledge, 8(30), 141-165. (in Persian)
Etemadi, H., Abduli, L. (2015). Earning smoothing and stock price performance in the financial crisis. Journal ofFinancialAccounting, 7(25),1-28. (in Persian)
Fan, J. P. H., Rui, O. M. & Zhao, M. (2008). Public governance and corporate finance: Evidence from corruption cases. Journal of Comparative Economics, 36, 343–364.
Fan, G. &Wang, X. (2006). Marketization index for China's provinces. China: National Economic Research Institute.
Faccio, M. (2006). Politically connected firms. American Economic Review, 96 (1): 369-386.
Francis, J. R., Khurana, I. K., Pereira, R. (2003). Investor protection laws, accounting and auditing around the world. Asia Pac. J. Account. Econ. 1 (1), 1–30.
Hamidian, M., Taghizadeh, N. (2018). Audit quality, investor support, and earnings management during the financial crisis. Audit Knowledge Quarterly , 18(2), 129-148 . (in Persian)
Hajiha, Z., Ghane, A. (2016). Investigating the Impact of Audit Quality on Investment Opportunity of Companies Listed in Tehran Stock Exchange. Quarterly Journal of Auditing Knowledge, 16 (63), 103-128. (in Persian)
Heidari, M., Qaderi, B. & Rasouli, P. (2016). The Effect of Audit Quality on Agency Costs and Information Asymmetry: Structural Equation Modeling Approach. The Iranian Accounting and Auditing Review, 23(3), 353-372. (in Persian)
Henry, Darren. (2010). Agency costs, ownership structure and corporate governance compliance: A private contracting perspective. Pacific- Basin Finance Journal, 18, 24-46.
Hudaib, M., Cooke, T. E. (2005). The impact of managing director changes and financial distress on audit qualification and auditor switching. J. Bus.Finance Account, 32(9–10),1703–1739
Iatridis, G. E. (2012). Accounting disclosures, accounting quality and conditional andunconditional conservatism. International Review of Financial Analysis, 20, 88-102.
 Jamali, A., & Karami, M. (2016). Investigating the Effect of Agency Costs on Auditing in Companies Acquired in Tehran Stock Exchange. Audit Science, 16(64), 81-98. (in Persian)
Jantadej, P. (2006). Using The Combination of Cash Flow Components to Predict Finance Distress. ph.D. The Graduate College at the University of Nebraska.
Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers. American Economic Review, 76, 323–329.
Karamshahi, B. (2017). The Effect of Audit Quality on Earnings Management & Conservatism of Listed Companies in Tehran Stock Exchange & Agency Cost. Accounting and Auditing Studies, 6(21), 86-101. (in Persian)
Khurram, Sh., Thierry, P., Ghulame, R., & Osama, E. T. (2017). Audit Quality During the Global Financial Crisis: The Investors' Perspective. Research in International Business and Finance, 45, 94-105.
Khan, A., Dessalegn, G. M., & Muttakin, M. B. (2016). Corporate political connections, agency costs and audit quality. International Journal of Accounting & Information Management, 24. 357-374
Khodadadi, V., Ghorbani, R. & Khandari, N. (2014). Investigating the effect of ownership structure on audit fees. The Iranian Accounting and Auditing Review, 21(1), 57-72. (in Persian)
Kurdistani, GH., Masoumi, J., Baqayi, V. (2013). Forecasting Profit Management Level Using Artificial Neural Networks. Journal of Accounting developments, 5(1), 169-190. (in Persian)
Kordestani, Gh. & Rahimi, M. (2010). Audit quality, cost of capital and earning management. Emirical Studies in Financial Accounting, 26(7), 71-92 (in Persian).
Lee, W. & Wang, L. (2016). Do political connections affect stock price crash risk? Firm-level evidence from China. Review of Quantitative Finance and Accounting, 1, 1-34.
Lin, K. J., Karim, E. K. & Carter, C. (2015). Why does China's stock market have highly synchronous stock price movements? An information supply perspective Advances in Accounting, 31(1), 68-791.
Mashaykhi, B., Hasanzadeh, SH. & Amini, Y. (2016). The effect of internal audit quality on an independent audit: Structural equation modeling approach. The Iranian Financial Accounting and Auditing Research, 31(8), 56-41. (in Persian)
Mojtahedzadeh, V. (2011). The Relationship of Agency Theory and Owner Manager in Listed Companies on Tehran Stock Exchange (TSE),  Accounting Research, 3(10), 4. (in Persian)
McKee, T. M., Eilifsen. A., & Lensberg, T. (2006). Bankruptcy theory development and classification via genetic programming. European Journal of Operational Research, 169, 667-697.
Nourbakhsh, M., Emadei, J., Sharifzadeh, M. (2017). Investigating the Relationship between Audit Quality and the Probability of Financial Crisis of Listed Companies in Tehran Stock Exchange. College of Management and Accounting, Rasht Unit. (in Persian)
Royaee, R., Mahdifard, M. & Rasouli, P. (2014). Political management and share price of the companies listed on Tehran Stock Exchange: Test of Political Economy Theory. The Iranian Journal of Scientific Science Research, Financial Analysis, 25(8), 19-28. (in Persian)
Seddighi, R., Pourbehi, R. (2018). The analyzing effective factors on agency costs with emphasis on the ratio of operating expenses to sales, Accounting Research, 9(36), 65-80. (in Persian)
Valizadeh Larijani, A., Rahmani, A., Sadeh, S. (2018). Internal control report disclosure, agency cost and earnings management internal control report disclosure, agency cost and earnings management. Journal of Management Accounting and Auditing Knowledge, 7(25), 29-40. (in Persian) 
Vali pour, Kh. & Khoram, A. (2011). Effectiveness of firms leading mechanisms in order to reduce agenty costs. The Iranian Management Accounting, 8(4), 61cs after the Enron scandal in the French context, Crises et nouvelles problématiques de la Valeur, Nice: France.
Ang, James S., Rebel A. Cole., & James Wuh Lin. (2000). Agency costs and ownership structure. Journal of finance, 55, 81-106.
Badavarnahandi, Y., dadashzade, G. (2015). The relationship between agency costs and stock mispricing with emphasis on the role of intermediate compensation of the board. Financial Management Strategy, 3(4), 51-71. (in Persian)
Birami, L. & Rostami, V. (2014). The effect of the audit quality on agency costs of listed companies in Tehran Stock Exchange. Journal of Economic, 14 (9-10), 41-54. (in Persian)
Boubakri, N., Cossert, J.C., & Saffar, W. (2012). Political connections and the cost of equity capital, Journal of Corporate Finance, 18, 541-559.
Bliss, M.A. & Gul, F.A., (2012). Political connection and cost of debt: Some Malaysian evidence. Journal of Banking and Finance, 36(5):1520–1527
Bushman, R. and J. Piotroski. (2006). Financial Reporting Incentives for Conservative Accounting: The Influence of Legal and Political Institutions. Journal of Accounting & Economics, 42, 107–148.
Darabi, R.(2017). Capital Structure and Financial Crisis Relationship. Quarterly Journal of Fiscal and Economic Policies, 5(17), 51-72. (in Persian)
DeAngelo, L. (1981). Auditor size and auditor quality. Journal of Accounting and Economics, 3, 183-199.
Etemadi, H., Ahmadi Gorji, J. (2017). Investigating the effect of political connection on investment and decrease in financial constrains in listed firms of Tehran Stock Exchange. Journal of Accounting and Auditing Researches, 9(34): 4-23. (in Persian)
Ebrahimi, K., Bahraminasab, A., Mamashli, R. (2017). The Effect of Financial Crisis on the Quality of Financial Reporting. Journal of Accounting Knowledge, 8(30), 141-165. (in Persian)
Etemadi, H., Abduli, L. (2015). Earning smoothing and stock price performance in the financial crisis. Journal ofFinancialAccounting, 7(25),1-28. (in Persian)
Fan, J. P. H., Rui, O. M. & Zhao, M. (2008). Public governance and corporate finance: Evidence from corruption cases. Journal of Comparative Economics, 36, 343–364.
Fan, G. &Wang, X. (2006). Marketization index for China's provinces. China: National Economic Research Institute.
Faccio, M. (2006). Politically connected firms. American Economic Review, 96 (1): 369-386.
Francis, J. R., Khurana, I. K., Pereira, R. (2003). Investor protection laws, accounting and auditing around the world. Asia Pac. J. Account. Econ. 1 (1), 1–30.
Hamidian, M., Taghizadeh, N. (2018). Audit quality, investor support, and earnings management during the financial crisis. Audit Knowledge Quarterly , 18(2), 129-148 . (in Persian)
Hajiha, Z., Ghane, A. (2016). Investigating the Impact of Audit Quality on Investment Opportunity of Companies Listed in Tehran Stock Exchange. Quarterly Journal of Auditing Knowledge, 16 (63), 103-128. (in Persian)
Heidari, M., Qaderi, B. & Rasouli, P. (2016). The Effect of Audit Quality on Agency Costs and Information Asymmetry: Structural Equation Modeling Approach. The Iranian Accounting and Auditing Review, 23(3), 353-372. (in Persian)
Henry, Darren. (2010). Agency costs, ownership structure and corporate governance compliance: A private contracting perspective. Pacific- Basin Finance Journal, 18, 24-46.
Hudaib, M., Cooke, T. E. (2005). The impact of managing director changes and financial distress on audit qualification and auditor switching. J. Bus.Finance Account, 32(9–10),1703–1739
Iatridis, G. E. (2012). Accounting disclosures, accounting quality and conditional andunconditional conservatism. International Review of Financial Analysis, 20, 88-102.
 Jamali, A., & Karami, M. (2016). Investigating the Effect of Agency Costs on Auditing in Companies Acquired in Tehran Stock Exchange. Audit Science, 16(64), 81-98. (in Persian)
Jantadej, P. (2006). Using The Combination of Cash Flow Components to Predict Finance Distress. ph.D. The Graduate College at the University of Nebraska.
Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers. American Economic Review, 76, 323–329.
Karamshahi, B. (2017). The Effect of Audit Quality on Earnings Management & Conservatism of Listed Companies in Tehran Stock Exchange & Agency Cost. Accounting and Auditing Studies, 6(21), 86-101. (in Persian)
Khurram, Sh., Thierry, P., Ghulame, R., & Osama, E. T. (2017). Audit Quality During the Global Financial Crisis: The Investors' Perspective. Research in International Business and Finance, 45, 94-105.
Khan, A., Dessalegn, G. M., & Muttakin, M. B. (2016). Corporate political connections, agency costs and audit quality. International Journal of Accounting & Information Management, 24. 357-374
Khodadadi, V., Ghorbani, R. & Khandari, N. (2014). Investigating the effect of ownership structure on audit fees. The Iranian Accounting and Auditing Review, 21(1), 57-72. (in Persian)
Kurdistani, GH., Masoumi, J., Baqayi, V. (2013). Forecasting Profit Management Level Using Artificial Neural Networks. Journal of Accounting developments, 5(1), 169-190. (in Persian)
Kordestani, Gh. & Rahimi, M. (2010). Audit quality, cost of capital and earning management. Emirical Studies in Financial Accounting, 26(7), 71-92 (in Persian).
Lee, W. & Wang, L. (2016). Do political connections affect stock price crash risk? Firm-level evidence from China. Review of Quantitative Finance and Accounting, 1, 1-34.
Lin, K. J., Karim, E. K. & Carter, C. (2015). Why does China's stock market have highly synchronous stock price movements? An information supply perspective Advances in Accounting, 31(1), 68-791.
Mashaykhi, B., Hasanzadeh, SH. & Amini, Y. (2016). The effect of internal audit quality on an independent audit: Structural equation modeling approach. The Iranian Financial Accounting and Auditing Research, 31(8), 56-41. (in Persian)
Mojtahedzadeh, V. (2011). The Relationship of Agency Theory and Owner Manager in Listed Companies on Tehran Stock Exchange (TSE),  Accounting Research, 3(10), 4. (in Persian)
McKee, T. M., Eilifsen. A., & Lensberg, T. (2006). Bankruptcy theory development and classification via genetic programming. European Journal of Operational Research, 169, 667-697.
Nourbakhsh, M., Emadei, J., Sharifzadeh, M. (2017). Investigating the Relationship between Audit Quality and the Probability of Financial Crisis of Listed Companies in Tehran Stock Exchange. College of Management and Accounting, Rasht Unit. (in Persian)
Royaee, R., Mahdifard, M. & Rasouli, P. (2014). Political management and share price of the companies listed on Tehran Stock Exchange: Test of Political Economy Theory. The Iranian Journal of Scientific Science Research, Financial Analysis, 25(8), 19-28. (in Persian)
Seddighi, R., Pourbehi, R. (2018). The analyzing effective factors on agency costs with emphasis on the ratio of operating expenses to sales, Accounting Research, 9(36), 65-80. (in Persian)
Valizadeh Larijani, A., Rahmani, A., Sadeh, S. (2018). Internal control report disclosure, agency cost and earnings management internal control report disclosure, agency cost and earnings management. Journal of Management Accounting and Auditing Knowledge, 7(25), 29-40. (in Persian) 
Vali pour, Kh. & Khoram, A. (2011). Effectiveness of firms leading mechanisms in order to reduce agenty costs. The Iranian Management 

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History

  • Receive Date: 26 May 2018
  • Revise Date: 25 December 2019
  • Accept Date: 25 December 2019

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