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Article
Publication date: 1 August 2022

Abiot Tessema and Heba Abou-El-Sood

Audit rotation (AR) is a key policy initiative implemented in global jurisdictions to deal with concerns about audit quality. Auditing financial reports involves communicating…

Abstract

Purpose

Audit rotation (AR) is a key policy initiative implemented in global jurisdictions to deal with concerns about audit quality. Auditing financial reports involves communicating attested value-relevant company information to investors, and hence audit quality plays a role in the quality of financial reporting information. This paper aims to investigate whether AR affects the degree of information asymmetry (IS) between investors. It further aims to examine whether voluntary AR results in less asymmetric information compared to mandatory AR. Additionally, it examines whether political connections moderate the association between AR and IS.

Design/methodology/approach

The authors use data from publicly traded banks across the Gulf Cooperation Council (GCC) for the period 2010–2018. The authors include several variables to control for corporate governance and other firm-specific characteristics by using country-year fixed-effects regression model.

Findings

The authors find higher IS for banks that periodically rotate auditor, while banks voluntarily choose to rotate auditors obtain high-quality audits, which results in higher trading volume and lower stock return volatility, hence lower IS. The results suggest that when banks voluntarily choose to rotate auditors, investors perceive these banks as more committed to obtaining high-quality audits relative to mandatory AR. Providing higher quality audits enhances the credibility of reported information and thus reduce the level of IS. Moreover, IS following AR is higher for politically connected banks than for similar but politically unconnected banks. Finally, investors perceive voluntary AR as a disciplining tool, which mitigates IS. This mitigating role is not affected by bank political connectedness.

Research limitations/implications

This study has limitations as the definition of AR could be interpreted as binary or too narrow, and hence it may not be appropriate to generalize findings to different contexts. Nonetheless, this study casts light on a new perspective to reconcile the existing mixed evidence on the influence of AR on IS and the moderating role of political connections. A further limitation is that because of data unavailability, the authors were unable to use other proxies (e.g. bid-ask spreads and analyst forecast dispersion) of IS.

Practical implications

The present findings provide insight to regulators, policymakers and standard setters on the potential adverse effect of political connections on the role of AR in mitigating IS. The results underscore the importance of voluntary AR, and suggest that regulators, policymakers and standard setters encourage firms to rotate their auditors periodically.

Originality/value

This study provides evidence in a setting that is unique at the economic, social and regulatory levels. Prior literature is lacking and has been centered on developed countries or focusing on single-country specifications. The data set of this study is unique and allows us to examine the interplay between political influence that arises through ownership and management roles of influential members of state.

Details

Meditari Accountancy Research, vol. 31 no. 5
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 1 June 2022

Ghulame Rubbaniy, Ali Awais Khalid, Abiot Tessema and Abdelrahman Baqrain

The purpose of the paper is to investigate co-movement of major implied volatility indices and economic policy uncertainty (EPU) indices with both the health-based fear index and…

Abstract

Purpose

The purpose of the paper is to investigate co-movement of major implied volatility indices and economic policy uncertainty (EPU) indices with both the health-based fear index and market-based fear index of COVID-19 for the USA and the UK to help investors and portfolio managers in their informed investment decisions during times of infectious disease spread.

Design/methodology/approach

This study uses wavelet coherence approach because it allows to observe lead–lag nonlinear relationship between two time-series variables and captures the heterogeneous perceptions of investors across time and frequency. The daily data used in this study about the USA and the UK covers major implied volatility indices, EPU, health-based fear index and market-based fear index of COVID-19 for both the first and second waves of COVID-19 pandemic over the period from March 3, 2020 to February 12, 2021.

Findings

The results document a strong positive co-movement between implied volatility indices and two proxies of the COVID-19 fear. However, in all the cases, the infectious disease equity market volatility index (IDEMVI), the COVID-19 proxy, is more representative of the stock market and exhibits a stronger positive co-movement with volatility indices than the COVID-19 fear index (C19FI). This study also finds that the UK’s implied volatility index weakly co-moves with the C19FI compared to the USA. The results show that EPU indices of both the USA and the UK exhibit a weak or no correlation with the C19FI. However, this study finds a significant and positive co-movement of EPU indices with IDEMVI over the short horizon and most of the sampling period with the leading effect of IDEMVI. This study’s robustness analysis using partial wavelet coherence provides further strengths to the findings.

Research limitations/implications

The investment decisions and risk management of investors and portfolio managers in financial markets are affected by the new information on volatility and EPU. The findings provide insights to equity investors and portfolio managers to improve their risk management practices by incorporating how health-related risks such as COVID-19 pandemic can contribute to the market volatility and economic risks. The results are beneficial for long-term equity investors, as their investments are affected by contributing factors to the volatility in US and UK’s stock markets.

Originality/value

This study adds following promising values to the existing literature. First, the results complement the existing literature (Rubbaniy et al., 2021c) in documenting that type of COVID-19 proxy matters in explaining the volatility (EPU) relationships in financial markets, where market perceived fear of COVID-19 is appeared to be more pronounced than health-based fear of COVID-19. Second, the use of wavelet coherence approach allows us to observe lead–lag relationship between the selected variables, which captures the heterogeneous perceptions of investors across time and frequency and have important insights for the investors and portfolio managers. Finally, this study uses the improved data of COVID-19, stock market volatility and EPU compared to the existing studies (Sharif et al., 2020), which are too early to capture the effects of exponential spread of COVID-19 in the USA and the UK after March 2020.

Details

Studies in Economics and Finance, vol. 40 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 19 June 2017

Abiot Mindaye Tessema, Samy Garas and Kienpin Tee

The purpose of this paper is to investigate whether disclosure as required by Islamic Financial Service Board Standard No. 4 (IFSB-4) influences information asymmetry among…

Abstract

Purpose

The purpose of this paper is to investigate whether disclosure as required by Islamic Financial Service Board Standard No. 4 (IFSB-4) influences information asymmetry among investors in the Gulf Cooperation Council (GCC) member countries. In addition, the paper investigates whether the influence of IFSB-4 on information asymmetry varies between Islamic and conventional financial institutions.

Design/methodology/approach

The paper tests the hypotheses using a sample of firms listed in the GCC over a period of 2000-2013. Ordinary least square regression and fixed-effects estimation techniques are applied to test the hypotheses.

Findings

The findings reveal that information asymmetry among investors is lower after the implementation of IFSB-4 than before, indicating that the standard has increased transparency. The results also reveal that information asymmetry after the implementation of IFSB-4 is lower for Islamic than for conventional financial institutions. This suggests that IFAB-4 promotes more transparency for Islamic than conventional institutions.

Research limitations/implications

Owing to data availability, we were unable to use other proxies of information asymmetry, e.g. bid-ask spreads, and the level of disclosure, e.g. self-constructed disclosure index.

Practical implications

The paper concludes that disclosures under IFAB-4 reduce information asymmetry among investors. In this context, this study increases the awareness of standard setters academics investors regulators and many other stakeholders about the economic consequences of disclosure standards in the region.

Originality/value

This study takes a first step to fill evident gaps in the literature by investigating the influences of disclosure standard on information asymmetry in a unique setting that is often ignored by accounting researchers, which helps to widen our knowledge on accounting practices across the globe.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 10 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 5 July 2024

Abiot Mindaye Tessema, Muhammad Kaleem Zahir-Ul-Hassan and Ammad Ahmed

The purpose of this study is to examine the influence of corporate governance (CG) mechanisms on earnings management (EM) within the Gulf Co-operation Council (GCC) countries. In…

Abstract

Purpose

The purpose of this study is to examine the influence of corporate governance (CG) mechanisms on earnings management (EM) within the Gulf Co-operation Council (GCC) countries. In addition, the impact of firm’s political connections (PCs) on EM is investigated, as well as whether it moderates the relationship between CG and EM.

Design/methodology/approach

Fixed-effects model is used on a sample of non-financial firms across the GCC countries to test the hypotheses. Moreover, a two-stage least squares method and a propensity score matching procedure are used to mitigate potential reverse causality and sample selection bias.

Findings

This study reveals that CG mechanisms such as board size and board independence are negatively associated with EM, while CEO duality is positively association with EM. In addition, this study shows that institutional ownership and blockholders do not influence EM. Furthermore, PCs are shown to play a moderating role in the relationship between CG and EM. The results of this study are robust to endogeneity testing and to alternative measures of CG.

Research limitations/implications

Because of a lack of data, the authors do not consider additional CG attributes such as tenure, education and age of board members. Future research could explore the impact of these attributes when data becomes available.

Practical implications

This study provides valuable insights for government officials, policymakers, standard-setters, regulators and corporations by presenting new evidence on the relationship among CG, PCs and EM. Moreover, this study underscores that, in the absence of a strong institutional infrastructure and investor protection, relying solely on strong CG and Islamic values and GCC culture may have a limited impact on effective monitoring of opportunistic managerial behaviors.

Originality/value

This study contributes to existing literature with a specific focus on the unique political, legal, institutional, social and cultural setting of the GCC region. Moreover, this study provides new insights that PCs serve as a governance mechanism in mitigating EM because relatively little attention has been given to the impact of PCs in improving accounting outcomes, especially in the context of the GCC region where Islamic ethical norms often shape business practices.

Details

International Journal of Ethics and Systems, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2514-9369

Keywords

Article
Publication date: 21 January 2022

Abiot Tessema and Ghulame Rubbaniy

The purpose of this study is to investigate how changes in the firm's information disclosure practices impact the way investors process macroeconomic news. Specifically, the…

Abstract

Purpose

The purpose of this study is to investigate how changes in the firm's information disclosure practices impact the way investors process macroeconomic news. Specifically, the authors examine the role of derivative instruments and hedging activities disclosure, as required by SFAS 133, in shaping invertors response to good and bad interest rate news. In addition, the authors examine whether the effect of SFAS 133 on investors' response to good and bad interest rate news varies between firms with higher and lower earnings volatility.

Design/methodology/approach

This study uses data on all US public firms over the period from 1990 to 2019. The authors mainly apply multivariate regression and a difference-in-difference approach to test their hypotheses.

Findings

The results show a significant decrease in the asymmetry of responses to good and bad interest rate news for users of interest rate derivatives following the adoption of SFAS 133. However, in contrast to this finding, the authors also find that the adoption of SFAS 133 has no impact on the asymmetry of responses to good and bad interest rate news for nonusers of interest rate derivatives. Consistent with the ambiguity theory, the finding suggests that SFAS 133 indeed decreases investors’ uncertainty (ambiguity) about the cash flow implications of changes in the interest rate. The authors also find that the decrease in the asymmetry of response to good and bad interest rate news after the adoption of SFAS 133 is greater for users of interest rate derivatives with higher than lower earnings volatility. This implies that derivatives and hedging activities disclosure, as required by SFAS 133, are more important for firms with higher than lower earnings volatility. The finding is consistent with the idea that investors demand more accounting information when underlying earnings volatility is higher. In a set of additional analyses, the authors find that the effect of SFAS 133 on investors' response to good and bad interest rate news varies depending on the level of analyst coverage and interest rate exposure. Specifically, the authors find that the decrease in the asymmetry of response to good and bad interest rate news after the adoption of SFAS 133 is greater for users of interest rate derivatives with higher interest rate exposure and lower analyst coverage.

Practical implications

The findings of this study help market participants including regulators and standard setters to understand the impact of mandatory disclosure practices on investors' reaction to macroeconomic news. Moreover, the findings of the study help managers to understand the influence firm-specific characteristics (e.g. earnings volatility, analyst coverage and interest rates exposure) on the effectiveness of mandatory derivative instruments and hedging activities disclosure.

Originality/value

To the best of the authors' knowledge, this is the first paper to explore how firm-specific information environment affects the way investors process macroeconomic news. This study contributes to the literature by providing the empirical evidence that derivatives instruments and hedging activities, as required by SFAS 133, affect investors' response to good and bad interest rate news. In doing so, the results provide insights about how firm-specific information environment affects the way investors process macroeconomic news. This study shows that the cross-sectional variation in earnings volatility, analysts’ coverage and interest rate exposure affects the impact of SFAS 133 on investors' response to good and bad interest rate news. The findings are not only the notable addition to the existing literature on the topic but also can aid to market participants including policy makers, regulators, standard setters and managers to understand the influence of firm-specific characteristics on the effectiveness of mandatory derivative instruments and hedging activities disclosure. Finally, the findings contribute to the general debate about the effectiveness of SFAS 133 by showing that the adoption of SFAS 133 indeed decreases information ambiguity.

Details

International Journal of Managerial Finance, vol. 19 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 30 April 2020

Abiot Tessema

The purpose of this paper is to investigate the impact of audit quality on information asymmetry for a sample of leading listed local banks in the Gulf Cooperation Council (GCC)…

Abstract

Purpose

The purpose of this paper is to investigate the impact of audit quality on information asymmetry for a sample of leading listed local banks in the Gulf Cooperation Council (GCC). In addition, the paper examines whether a firm's political connections moderate the association between audit quality and information asymmetry.

Design/methodology/approach

The author employs country fixed effects to examine the impact of audit quality on information asymmetry. The paper uses a sample of 49 leading listed local banks across the GCC and 236 bank-year observations, over the period of 2012–2016.

Findings

Using trading volume, trade value and stock return volatility as proxies for information asymmetry and audit quality through auditors' opinion and audit size, the paper documents that audit quality plays an important role in improving the quality of financial information reporting by providing greater independent assurance of the credibility of financial reports. The paper also documents that a firm's political connections have no effect on the association between audit quality and information asymmetry, indicating that the beneficial effects of audit quality are no greater for politically connected firms than for similar but politically unconnected firms.

Practical implications

The findings of the study help policymakers, standard-setters and regulators to understand the potential adverse effect of political connections on the role of audit quality on information asymmetry. The study also provides important insights for audit regulators to better identify and understand the benefits of audit quality and to take policy matters that influence audit quality seriously.

Originality/value

The study increases our understanding of the impact of audit quality on the level of information asymmetry in different economic, legal and political institutions, regulatory and litigation incentives and social contexts compared to that of research conducted using data collected from developed and other emerging countries. This will help to widen our knowledge on the role of audit quality on information asymmetry across the globe.

Details

International Journal of Managerial Finance, vol. 16 no. 5
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 7 March 2016

Abiot Mindaye Tessema

The lessons and merits of changes in the recognition and disclosure of derivative instruments and hedging activities are still debated and are a major policy issue. Prior studies…

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Abstract

Purpose

The lessons and merits of changes in the recognition and disclosure of derivative instruments and hedging activities are still debated and are a major policy issue. Prior studies provide mixed evidences on the economic consequences of mandatory derivative instruments ' recognition and disclosure. This paper aims to provide empirical evidence on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior. More importantly, this paper aims to investigate the role of product market competition on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior.

Design/methodology/approach

This paper tests the author ' s hypotheses using the fixed-effects estimation technique, where it includes firm dummies in all the regressions. This approach enables to control for unobserved firm effects (fixed effects) on firms’ risk-management behavior that are assumed to be constant through time but vary across firms.

Findings

The author finds that mandatory recognition and disclosure of derivative instruments and hedging activities, on average, decreases firms’ market rate risk exposure. This finding suggests that after the implementation of the recognition and disclosure of derivative instruments and hedging activities required by Statement of Financial Accounting Standards No. 133 (SFAS 133), firms engage in more prudent risk-management activities to mitigate the potential cost of earnings volatility imposed by the standard. However, the decrease in market rate risk exposure is lower when the level of product market competition is higher. This finding is consistent with the idea that the recognition and disclosure of derivative instruments and hedging activities required by SFAS 133 unintentionally forces firms in competitive industries to engage in significant risk-taking. The result suggests that more disclosure in risk management may change risk-management incentives in undesirable ways if firms face the threat of entry in their product markets.

Practical/implications

The results provide a new understanding on the role of product market competition on the effectiveness of mandatory derivative instruments ' recognition and disclosure. The findings imply that standard setters should take product market competition into consideration before making derivative instruments and hedging activities ' recognition and disclosure mandatory for all firms.

Originality/value

The paper contributes to the accounting literature by providing a new insight into the moderating role of product market competition in the accounting recognition and disclosure regulation and firms’ reporting behavior relation. Moreover, the paper extends the current literature on the effects of SFAS 133 on risk-management activities and sheds light on the impact of accounting regulations on firms’ real economic behavior.

Details

International Journal of Accounting and Information Management, vol. 24 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

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