InternationalEvidence - International Evidence on the...

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International Evidence on the Association between Excess Auditor Remuneration and the Implied Required Rate of Return Ole-Kristian Hope Rotman School of Management University of Toronto okhope@rotman.utoronto.ca Tony Kang School of Accountancy Singapore Management University tonykang@smu.edu.sg Wayne Thomas Michael F. Price College of Business University of Oklahoma wthomas@ou.edu Yong Keun Yoo Korea University Business School Korea Univeristy yooyk@korea.ac.kr November 14, 2006 We thank Zhihong Chen, Mark Clatworthy, Gus De Franco, Stephan Hollander, Clive Lennox, Sue McCracken, Shiva Shivakumar, Heidi Vanderbauwede, Larry Weiss and seminar participants at Brock University, Cardiff Business School, Chulalongkorn University, Korea University, Norwegian School of Economics and Business Administration, Norwegian School of Management, Oklahoma State University, Seoul National University, Tilburg University, University of Tennessee, University of Western Australia, 2005 HKUST-SMU Accounting Research Camp (Singapore), 2006 AAA IAS Mid-year meeting (Los Angeles), 2006 Global Issues in Accounting Conference at UNC (Chapel Hill), 2006 LBS Summer Symposium (London), 2006 AAA annual meeting (Washington, D.C.), and 18 th Asian-Pacific Conference on International Accounting Issues (Kapalua) for helpful comments on various versions of this paper. Hope acknowledges the financial support of the Deloitte & Touche Professorship and the Social Sciences and Humanities Research Council of Canada. Kang and Yoo are grateful to the Wharton-SMU Research Center at Singapore Management University for financial support.
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International Evidence on the Association between Excess Auditor Remuneration and the Implied Required Rate of Return ABSTRACT This study examines the relation between excess auditor remuneration and the implied required rate of return (IRR hereafter) on equity capital in global markets. We conjecture that when auditor remuneration is excessively large, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence. This perceived lack of independence increases the information risk associated with the credibility of financial statements, thereby increasing IRR. Consistent with this notion, we find that IRR is increasing in excess auditor remuneration, but only in countries with stronger investor protection. Finding evidence of a relation only in stronger investor protection countries is consistent with the more prominent role of audited financial statements for investors’ decisions in these countries. In settings where investors are less likely to rely on audited financial statements and instead rely on alternative sources of information (i.e., in countries with weaker investor protection), the impact of client/auditor bonding should have less of an effect on investors’ decisions.
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1 1. Introduction In this paper, we hypothesize that audits can impact the perceived credibility of financial statements and therefore can have an effect on firms’ implied required rate of return (IRR
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This note was uploaded on 01/23/2011 for the course LAW 3200 taught by Professor Staff during the Spring '10 term at Georgia State University, Atlanta.

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InternationalEvidence - International Evidence on the...

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