THE IMPACT OF AUDIT QUALITY ON FIRM PERFORMANCE: EMPIRICAL EVIDENCE IN VIETNAM

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY VIETNAM THE HAGUETHE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF AUDIT QUALITY ON FIRM PERFORMANCE: EMPIRICAL EVIDENCE IN VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ART IN DEVELOPMENT ECONOMICS By LÊ THỊ ANH THƯ Academic Supervision Dr LÊ HỒ AN CHÂU HO CHI MINH CITY, November, 2016 DECLARATION “I certify the content of this thesis entitled “The impact of audit quality on firm performance: empirical evidence in Vietnam” has not already been submitted for any degree and is not being currently submitted for any other degrees I certify that, to be the best of my knowledge, any help received in preparing this thesis and all sources used, have been acknowledged in this dissertation” Signature Lê Thị Anh Thư Date: November ……., 2016 I ACKNOWLEDGEMENT First and foremost, I would like to express my gratefulness and my dearest thank to my supervisor, Dr Lê Hồ An Châu for her guidance and support during my thesis completion In additional, I would like to thank Dr Trương Đăng Thụy, who also gave me the useful help for my research More special thanks for all lecturers and staffs at VietnamNetherlands Program and my VNP 21 classmates Furthermore, thanks to the support from my colleagues at Gia Cat Consulting and Auditing Co., Ltd who create more conditions for me to complete this thesis Last but not least, I would like to express my many thanks to my family and my friends, who encourage and support to me in both mental and physical during the thesis process II ABBREVIATIONS CSMAR: China Stock Market Accounting Research ICAEW: Institution of Chartered Accountants in England and Wales IPO: Initial Public Offering ISA: International Standards Auditing IFAC: International Federation of Accountants GAO: Government Accountability Office GMM: Generalized Method of Moments HOSE: Hochiminh Stock Exchange NSE: Nigeria Stock Exchange OLS: Ordinary Least Squares PCAOB: Protecting Investors through Audit Oversight TPP: Trans-Pacific Strategy Economic Partnership Agreement UKFRC: United Kingdom Financial Reporting Council VACPA: Vietnam Association of Certified Public Accountants VSA: Vietnam Standards of Auditing WTO: World Trade Organization III ABSTRACT This study empirically examines the impact of audit quality on firm performance in Vietnam Audit quality is considered as an external monitoring factor which objectively affects firm performance In this thesis, audit quality is measured by three variables including audit rotation, audit reputation and audit experience whereas firm performance is proxied by accounting profits (ROA), market value (Tobin’s Q) and risk of bankruptcy (Zscore) The dataset includes 268 listed non-financial companies in Vietnam over the period from 2010 to 2015 The results show that there is no relationship between audit rotation, audit reputation and audit experience on Tobin’s Q and Z-score However, audit reputation and audit experience are insignificantly correlated with firm profitability The effect of audit rotation on ROA is positive, suggesting that companies which have audit rotation are more likely to have higher profits This implies that the change of audit firm increases the independence of auditors as well as enhances audit quality and hence positively affects firm performance Key words: audit quality, audit rotation, audit reputation, audit firm experience, firm performance, listed companies, Vietnam IV TABLE OF CONTENTS CHAPTER 1:INTODUCTION 1.1 PROBLEM STATEMENT 1.2 RESEARCH OBJECTIVES AND RESEARCH QUESTIONS 1.3 RESEARCH METHODOLOGY AND DATA 1.4 RESEARCH CONTRIBUTION 1.5 THESIS STRUCTURE: CHAPTER 2:THEORETICAL FRAMEWORK AND EMPIRICAL EVIDENCE OF AUDIT QUALITY AND FIRM PERFORMANCE 2.1 THEORETICAL LITERATURE OF AUDIT QUALITY AND FIRM PERFORMANCE 2.1.1 Audit quality definition and relevant theoretical framework 2.1.1.1 Agency Theory 2.1.1.2 The stakeholder theory 2.1.1.3 Theory of Asymmetric Information 2.1.2 Definition and measure of firm performance 10 2.2 EMPIRICAL EVIDENCE ABOUT THE IMPACT OF AUDIT QUALITY ON FIRM PERFORMANCE 11 2.2.1 The impact of audit rotation on firm performance 12 2.2.2 The impact of audit reputation on firm performance 16 2.2.3 The impact of audit firm experience on firm performance 17 2.2.4 The effect of Vietnamese Auditing Standards (VSA 220) on “Quality control of financial statements audit activities” on firm performance 18 2.3 THE CONCEPTUAL FRAMEWORK 19 CHAPTER 3:RESEARCH METHODOLOGY AND DATA 20 3.1 DATA COLLECTION 20 3.2 METHODOLOGY 20 CHAPTER 4:DATA ANALYSIS AND EMPIRICAL RESULTS 27 4.1 DESCRIPTIVE STATISTICS AND BASIC ESTIMATION 27 4.1.1 Descriptive Statistics 27 4.1.2 The correlation matrix of variables 32 4.1.3 Heteroskedasticity 34 4.1.4 Identification of Endogeneity Problem 34 4.2 REGRESSION RESULTS AND DISCUSSION 35 4.2.1 Audit quality and firm performance measured by ROA: 35 4.2.2: Audit quality and firm performance measured by Tobin’s Q: 38 4.2.3: Audit quality and firm performance measured by Z-Score 39 4.2.4: Changing Policy and Firm Performance 40 V CHAPTER 5:CONCLUSIONS AND POLICY IMPLICATIONS 41 5.1 MAIN FINDINGS 41 5.2 POLICY IMPLICATION 42 5.3 LIMITATION AND FURTHER RESEARCH 43 REFERENCES 44 APPENDIX 50 VI LIST OF TABLES Table 1: Rules on mandatory audit firm rotation and mandatory auditor rotation for listed companies .49 Table 2: The Z-Score level 23 Table 3: Summary of variables and predicted sign of coefficient 26 Table 4: Categorized business fields 27 Table 5: Descriptive Statistic 28 Table 6: Correlation matrix 33 Table 7: Heteroskedasticity test 34 Table 8: Endogeneity test 35 Table 9: System GMM estimation of firm performance measured by ROA 36 Table 10: System GMM estimation of firm performance measured by Tobin’s Q 38 Table 11: System GMM estimation of firm performance measured by Z-Score .39 Table 12: Companies in year of establishment 52 VII LIST OF FIGURES Figure 2.1: The Agency Theory Figure 2.2: The Stakeholder model of the corporation Figure 2.3: The Asymmetric Information Theory 10 Figure 2.4: The Analytical Framework 20 Figure 4.1: The prediction of relationship between audit firm experience and ROA 30 Figure 4.2: The prediction of relationship between audit firm experience and Tobin’s Q 31 Figure 4.3: The prediction of relationship between audit firm experience and Z-Score 32 VIII CHAPTER 1: INTRODUCTION 1.1 Problem statement From the agency theory’s perspective, the separation of function between ownership and management in corporation leads to information asymmetry problem and conflict of interest between managers and shareholders The role of third party who gives the opinion related to financial information disclosure is very important and audit quality is considered as an external monitoring factor which has a significant effect on firm performance There are some previous studies which investigate the role of audit quality in terms of its effect on firm performance However, they use the different measures of audit quality and conduct in different markets, so the empirical results are inconsistent Some studies point out that the impact of audit quality on firm performance is positive whereas other studies find negative or insignificant effects on firm performance However, the role of audit quality as a key driver of firm performance has not yet attracted sufficient attention from researchers and policy makers in Vietnam This may result in the fact that investors lack the proper consideration about audit quality which might affect the financial disclosure and useful information for investors’ decision-making In the process of integration and development, Vietnam has more opportunities to approach and take part in the global organization such as WTO, TPP etc One of the difficulties in the foreseen future isto guarantee the reliance and the transparency of declared financial information to attract foreign investment and create the fair competitive environment The collapse of Arthur Andersen, one of the five biggest audit firms (Big 5) in 2002, the scandal and infringement related to audit quality recently and the integrity of firms’ financial statements force to enhance the investors’ perception about the audit quality and even the pressure to improve the audit quality of external parties In Vietnam, there is also a rising concern about this issue after a serial of scandal of listed companies in the stock exchange such as the evaporated inventories of Truong Thanh Corp (TTF), NTACO Corp (ATA) and bad debt from Ocean Group (OGC) which led to sharp deterioration in stock market and investor’s belief Table 1: Rules on mandatory audit firm rotation and mandatory auditor rotation for listed companies (Continued) STT Country Mandatory audit firm rotation Detail Mandatory auditor rotation 30 Taiwan No Yes 31 Thailand No Yes 32 United Kingdom No Yes 33 Venezuela Partial A policy of rotation every three years for banks is scheduled for 2014 Detail Every five years Every five years Every five years No The following information sources were used to compile this table: Cameran et al (2005); GAO (2003); Siregar et al (2012); Ewelt-Knauer et al (2012); www.worldbank.org/ifa/rosc.html; http://pcaobus.org/Rules/Rulemaking/Docket037/163_Deloitte_Touche_LLP.pdf Lennox (2014) https://msbfile03.usc.edu/digitalmeasures/clennox/intellcont/Book%20chapter-1.pdf, Siregar et al., (2012) 52 Table 12 : Companies by year of establishment No 10 11 12 13 14 15 16 17 18 19 20 Audit firm Cơng ty TNHH Kiểm tốn Tư vấn A&C Cơng ty TNHH kiểm tốn Mỹ (American Auditing - AA) Cơng ty TNHH Kiểm tốn Kế tốn Cơng ty TNHH Hãng Kiểm tốn AASC Cty TNHH Dịch Vụ Kiểm Toán, Kế Toán Và Tư Vấn Thuế AAT Cơng ty TNHH Dịch vụ Kiểm tốn Tư vấn UHY ACA Cơng ty TNHH Kiểm tốn Đơng Á Cơng ty TNHH Kiểm tốn AFC Việt Nam Cơng ty TNHH Kiểm tốn An Phú Cơng ty TNHH Kiểm tốn An Việt Cơng ty TNHH Kiểm tốn ASC Cơng ty TNHH Kiểm toán Thẩm định giá Việt Nam (AVA) Cơng ty TNHH Kiểm tốn BDO Cơng ty Kiểm tốn Kế tốn Hà Nội - CPA Cơng ty TNHH Deloitte Việt Nam Cơng ty TNHH Kiểm tốn DFK Việt Nam (DFK) Cơng ty TNHH Kiểm tốn DTL Cơng ty TNHH Ernst & Young Việt Nam Công ty TNHH Kiểm tốn FAC (FAC) Cơng ty TNHH Grant Thornton Abbreviation A&C AA AAC AASC AAT ACA AEA AFC An Phú An Việt ASC AVA BDO CPAVN DELOITTE DFK DTL EY FAC Grant Thornton Established date 1995 2001 13/02/1995 13/05/1991 04/06/2007 29/08/2006 27/03/2006 13/02/1995 2006 08/01/2003 21/12/2006 10/10/2006 09/12/2002 26/01/1999 1991 09/04/2003 09/07/2001 03/11/1992 07/04/2006 14/09/1999 53 Table 12 : Companies by year of establishment (Con’t) No Audit firm Abbreviation 21 IFC Cơng ty TNHH Kiểm tốn TV Tài quốc tế (IFC) 22 KPMG Công ty TNHH KPMG Việt Nam 23 Kreston ACA Cơng ty TNHH Kiểm tốn KRESTON ACA Việt Nam 24 Ksi Cơng ty TNHH Kiểm tốn KSI Việt Nam (KSI) 25 Nhân Tâm Việt Công ty TNHH Kiểm tốn Nhân Tâm Việt (NVT) 26 PKF Cơng ty TNHH PKF Việt Nam 27 PWC Công ty TNHH Pricewaterhouse Coopers Việt Nam 28 SAO VIET Công ty TNHH Kiểm tốn Sao Việt 29 TDK Cơng ty TNHH Kiểm toán Định giá Thăng Long – T.D.K 30 Tin Học (AISC) Cơng ty TNHH Kiểm tốn Dịch vụ Tin học 31 VACO Cơng ty TNHH Kiểm tốn VACO 32 VAE Cơng ty TNHH Kiểm tốn Định giá Việt Nam 33 Vietland Cơng ty TNHH Kiểm tốn - Tư vấn Đất Việt 34 Vietvalue Công ty TNHH Kiểm tốn Tư vấn Chuẩn Việt 35 VIỆT NHẤT Cơng ty TNHH Kiểm toán Việt Nhất (CTY K.T.V.N) The following information sources were used to compile this table which retrieved from Established date 24/10/2001 17/05/1994 24/08/2001 2002 22/09/2006 14/09/2015 14/05/1994 17/07/2006 2003 29/04/1994 27/11/2007 21/12/2001 26/09/2002 20/11/2003 03/11/2005 http://www.vacpa.org.vn/Page/GioiThieuCongTyKiemToan.aspx 54 The impact of audit quality measured by audit rotation, audit reputation and audit experience, respectively and simultaneously on ROA (TABLE 9)  Audit rotation - ROA (1) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 68.28 avg = 5.60 Prob > chi2 = 0.000 max = -| Corrected ROA | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag1 | -.4568284 2315582 -1.97 0.049 -.9106741 -.0029828 PERIOD_1 | 200523 0967178 2.07 0.038 0109596 3900864 LEVERAGE | -1.240522 3388618 -3.66 0.000 -1.904678 -.5763646 SG | 072331 0315867 2.29 0.022 0104222 1342399 LNASSET | -.0306074 0678338 -0.45 0.652 -.1635592 1023444 VSA220 | 0157882 0284809 0.55 0.579 -.0400334 0716098 _cons | 1.09091 8219883 1.33 0.184 -.5201575 2.701977 -Instruments for first differences equation Standard D.lag1 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ROA Instruments for levels equation Standard lag1 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ROA -Arellano-Bond test for AR(1) in first differences: z = -2.72 Pr > z = 0.007 Arellano-Bond test for AR(2) in first differences: z = 1.11 Pr > z = 0.266 -Sargan test of overid restrictions: chi2(10) = 64.21 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 15.55 Prob > chi2 = 0.113 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 12.04 Prob > Difference (null H = exogenous): chi2(5) = 3.51 Prob > iv(lag1) Hansen test excluding group: chi2(9) = 14.94 Prob > Difference (null H = exogenous): chi2(1) = 0.61 Prob > chi2 = chi2 = 0.034 0.622 chi2 = chi2 = 0.093 0.434 55  Audit reputation _ ROA (2) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 77.40 avg = 5.60 Prob > chi2 = 0.000 max = -| Corrected ROA | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag1 | -.3459692 1764981 -1.96 0.050 -.6918992 -.0000393 REP | -.2203829 2567047 -0.86 0.391 -.7235148 282749 LEVERAGE | -1.190774 2612711 -4.56 0.000 -1.702855 -.6786917 SG | 0553781 0258288 2.14 0.032 0047547 1060016 LNASSET | 0937162 1013446 0.92 0.355 -.1049155 292348 VSA220 | -.0046785 0205466 -0.23 0.820 -.0449491 035592 _cons | -.5616741 1.275893 -0.44 0.660 -3.062378 1.939029 -Instruments for first differences equation Standard D.lag1 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ROA Instruments for levels equation Standard lag1 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ROA -Arellano-Bond test for AR(1) in first differences: z = -2.33 Pr > z = 0.020 Arellano-Bond test for AR(2) in first differences: z = 1.05 Pr > z = 0.295 -Sargan test of overid restrictions: chi2(10) = 80.76 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 19.80 Prob > chi2 = 0.588 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 16.07 Prob > Difference (null H = exogenous): chi2(5) = 3.74 Prob > iv(lag1) Hansen test excluding group: chi2(9) = 19.75 Prob > Difference (null H = exogenous): chi2(1) = 0.05 Prob > chi2 = chi2 = 0.007 0.031 chi2 = chi2 = 0.020 0.821 56  Audit firm experience – ROA (3) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 78.12 avg = 5.60 Prob > chi2 = 0.000 max = -| Corrected ROA | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag1 | -.3817435 2115264 -1.80 0.071 -.7963276 0328407 EXP | -.0079556 0257703 -0.31 0.758 -.0584645 0425534 LEVERAGE | -1.195306 310163 -3.85 0.000 -1.803214 -.5873972 SG | 0494768 0263031 1.88 0.060 -.0020763 1010298 LNASSET | 0493985 0894745 0.55 0.581 -.1259683 2247652 VSA220 | -.0102255 0263674 -0.39 0.698 -.0619046 0414535 _cons | 1476648 7589844 0.19 0.846 -1.339917 1.635247 -Instruments for first differences equation Standard D.lag1 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ROA Instruments for levels equation Standard lag1 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ROA -Arellano-Bond test for AR(1) in first differences: z = -2.18 Pr > z = 0.030 Arellano-Bond test for AR(2) in first differences: z = 0.73 Pr > z = 0.463 -Sargan test of overid restrictions: chi2(10) = 84.24 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 20.16 Prob > chi2 = 0.407 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 15.06 Prob > chi2 = 0.010 Difference (null H = exogenous): chi2(5) = 5.10 Prob > chi2 = 0.404 iv(lag1) Hansen test excluding group: chi2(9) = 19.47 Prob > chi2 = 0.021 Difference (null H = exogenous): chi2(1) = 0.69 Prob > chi2 = 0.208 57  Audit rotation, audit reputation, audit firm experience – ROA (4) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(8) = 79.96 avg = 5.60 Prob > chi2 = 0.000 max = -| Corrected ROA | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag1 | -.4560694 2351313 -1.94 0.052 -.9169183 0047794 PERIOD_1 | 2192537 1221877 1.79 0.073 -.0202298 4587371 REP | -.2496756 2610508 -0.96 0.339 -.7613258 2619745 EXP | -.0055618 0339261 -0.16 0.870 -.0720558 0609321 LEVERAGE | -1.30992 3333043 -3.93 0.000 -1.963184 -.656655 SG | 0754042 0326916 2.31 0.021 0113298 1394786 LNASSET | 0550595 1137926 0.48 0.628 -.16797 2780889 VSA220 | 0150507 0320212 0.47 0.638 -.0477098 0778111 _cons | 1152803 1.183526 0.10 0.922 -2.204387 2.434948 -Instruments for first differences equation Standard D.lag1 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ROA Instruments for levels equation Standard lag1 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ROA -Arellano-Bond test for AR(1) in first differences: z = -2.42 Pr > z = 0.016 Arellano-Bond test for AR(2) in first differences: z = 0.76 Pr > z = 0.445 -Sargan test of overid restrictions: chi2(8) = 59.50 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(8) = 12.04 Prob > chi2 = 0.149 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(3) = 2.02 Prob > Difference (null H = exogenous): chi2(5) = 10.02 Prob > iv(lag1) Hansen test excluding group: chi2(7) = 12.03 Prob > Difference (null H = exogenous): chi2(1) = 0.01 Prob > chi2 = chi2 = 0.568 0.075 chi2 = chi2 = 0.100 0.935 58  The impact of audit quality measured by audit rotation, audit reputation and audit firm experience on Tobin’s Q (TABLE 10) Audit rotation – Tobin’s Q (1) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1501 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 6.20 avg = 5.60 Prob > chi2 = 0.401 max = -| Corrected TobinQ | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag2 | -.2483178 1487665 -1.67 0.095 -.5398949 0432592 PERIOD_1 | -3.722969 4.017176 -0.93 0.354 -11.59649 4.150551 LEVERAGE | -5.931196 34.36186 -1.73 0.084 -126.66 8.03605 SG | 5.028556 2.801887 -1.79 0.073 -10.52015 4630424 LNASSET | -.1105881 2.431495 -0.05 0.964 -4.876231 4.655055 VSA220 | 8053016 1.13398 0.71 0.478 -1.417259 3.027862 _cons | 32.39778 37.39889 0.87 0.386 -40.9027 105.6983 -Instruments for first differences equation Standard D.lag2 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).TobinQ Instruments for levels equation Standard lag2 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.TobinQ -Arellano-Bond test for AR(1) in first differences: z = -1.50 Pr > z = 0.013 Arellano-Bond test for AR(2) in first differences: z = -1.39 Pr > z = 0.165 -Sargan test of overid restrictions: chi2(10) = 192.83 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 39.26 Prob > chi2 = 0.242 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 31.98 Prob > Difference (null H = exogenous): chi2(5) = 7.28 Prob > iv(lag2) Hansen test excluding group: chi2(9) = 37.89 Prob > Difference (null H = exogenous): chi2(1) = 1.37 Prob > chi2 = chi2 = 0.000 0.201 chi2 = chi2 = 0.000 0.202 59  Audit reputation – Tobin’s Q (2) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1501 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 10.66 avg = 5.60 Prob > chi2 = 0.099 max = -| Corrected TobinQ | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag2 | -.2688558 1008843 -2.66 0.008 -.4665853 -.0711262 REP | 1.088729 9.45254 1.15 0.249 -7.639351 29.41393 LEVERAGE | -6.500434 24.91112 -2.61 0.009 -113.8292 -16.17943 SG | 3.009523 1.809607 -1.66 0.096 -6.556287 5372417 LNASSET | -2.724553 3.094273 -0.88 0.379 -8.789216 3.340109 VSA220 | 3021737 7534049 0.40 0.688 -1.174473 1.77882 _cons | 68.02361 48.13244 1.41 0.158 -26.31425 162.3615 -Instruments for first differences equation Standard D.lag2 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).TobinQ Instruments for levels equation Standard lag2 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.TobinQ -Arellano-Bond test for AR(1) in first differences: z = -1.57 Pr > z = 0.011 Arellano-Bond test for AR(2) in first differences: z = -1.39 Pr > z = 0.166 -Sargan test of overid restrictions: chi2(10) = 355.26 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 32.40 Prob > chi2 = 0.528 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 21.84 Prob > Difference (null H = exogenous): chi2(5) = 10.57 Prob > iv(lag2) Hansen test excluding group: chi2(9) = 32.00 Prob > Difference (null H = exogenous): chi2(1) = 0.40 Prob > chi2 = chi2 = 0.001 0.061 chi2 = chi2 = 0.000 0.151 60  Audit firm experience – Tobin’s Q (3) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1501 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 11.76 avg = 5.60 Prob > chi2 = 0.068 max = -| Corrected TobinQ | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag2 | -.7041879 3469224 -2.03 0.042 -1.384143 -.0242325 EXP | -4.540054 2.79352 -1.63 0.104 -10.01525 935144 LEVERAGE | -1.496225 41.49497 -0.36 0.718 -96.2909 66.3664 SG | -2.260336 1.643814 -1.38 0.169 -5.482153 9614805 LNASSET | 7.067122 6.95214 1.02 0.309 -6.558823 20.69307 VSA220 | 1.310717 1.743584 0.75 0.452 -2.106645 4.728079 _cons | -.9746507 66.88176 -0.01 0.988 -132.0605 130.1112 -Instruments for first differences equation Standard D.lag2 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).TobinQ Instruments for levels equation Standard lag2 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.TobinQ -Arellano-Bond test for AR(1) in first differences: z = -1.45 Pr > z = 0.014 Arellano-Bond test for AR(2) in first differences: z = -0.53 Pr > z = 0.599 -Sargan test of overid restrictions: chi2(10) = 11.36 Prob > chi2 = 0.330 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 6.32 Prob > chi2 = 0.787 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 4.19 Prob > Difference (null H = exogenous): chi2(5) = 2.14 Prob > iv(lag2) Hansen test excluding group: chi2(9) = 5.94 Prob > Difference (null H = exogenous): chi2(1) = 0.39 Prob > chi2 = chi2 = 0.523 0.830 chi2 = chi2 = 0.746 0.534 61  Audit rotation, audit reputation, audit firm experience – Tobin’s Q (4) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1501 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(8) = 12.16 avg = 5.60 Prob > chi2 = 0.144 max = -| Corrected TobinQ | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag2 | -.4502038 3714171 -1.21 0.102 -1.178168 2777603 PERIOD_1 | -1.591894 9.725763 -1.64 0.225 -34.98109 3.143202 REP | 1.481052 17.59388 0.84 0.400 -19.67286 49.2939 EXP | -5.008118 2.61967 -1.91 0.560 -10.14258 1263407 LEVERAGE | 15.15455 49.88454 0.43 0.669 -76.45466 119.0891 SG | 4.037114 2.359906 -1.71 0.087 -8.662443 5882163 LNASSET | 2.751369 6.736334 0.41 0.683 -10.4516 15.95434 VSA220 | 2.287908 2.113996 1.08 0.279 -1.855448 6.431265 _cons | 47.99912 76.78102 0.63 0.532 -102.4889 198.4871 -Instruments for first differences equation Standard D.lag2 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).TobinQ Instruments for levels equation Standard lag2 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.TobinQ -Arellano-Bond test for AR(1) in first differences: z = -1.78 Pr > z = 0.074 Arellano-Bond test for AR(2) in first differences: z = -0.25 Pr > z = 0.799 -Sargan test of overid restrictions: chi2(8) = 6.34 Prob > chi2 = 0.609 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(8) = 4.02 Prob > chi2 = 0.856 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(3) = 3.36 Prob > Difference (null H = exogenous): chi2(5) = 0.65 Prob > iv(lag2) Hansen test excluding group: chi2(7) = 4.01 Prob > Difference (null H = exogenous): chi2(1) = 0.00 Prob > chi2 = chi2 = 0.339 0.986 chi2 = chi2 = 0.778 0.956 62 The impact of audit quality measured by audit rotation, audit reputation and audit experience, respectively and simultaneously on Z-Score (TABLE 11)  Audit rotation – Z-Score (1) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 45.33 avg = 5.60 Prob > chi2 = 0.000 max = -| Corrected ZSCORE1968 | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag3 | 2837636 0955214 2.97 0.003 096545 4709822 PERIOD_1 | -.1543325 6893527 -0.22 0.823 -1.505439 1.196774 LEVERAGE | -7.213445 2.990659 -2.41 0.016 -13.07503 -1.351862 SG | 8493374 4479605 1.90 0.058 -.0286491 1.727324 LNASSET | -1.339846 9399487 -1.43 0.154 -3.182111 5024196 VSA220 | 1740955 1619256 1.08 0.282 -.1432729 4914639 _cons | 23.12576 12.64688 1.83 0.067 -1.661674 47.91319 -Instruments for first differences equation Standard D.lag3 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ZSCORE1968 Instruments for levels equation Standard lag3 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ZSCORE1968 -Arellano-Bond test for AR(1) in first differences: z = -2.10 Pr > z = 0.036 Arellano-Bond test for AR(2) in first differences: z = 0.71 Pr > z = 0.476 -Sargan test of overid restrictions: chi2(10) = 144.42 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 8.09 Prob > chi2 = 0.620 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 4.60 Prob > Difference (null H = exogenous): chi2(5) = 3.50 Prob > iv(lag3) Hansen test excluding group: chi2(9) = 5.34 Prob > Difference (null H = exogenous): chi2(1) = 2.75 Prob > chi2 = chi2 = 0.467 0.624 chi2 = chi2 = 0.804 0.097 63  Audit reputation – Z-Score (2) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 27.46 avg = 5.60 Prob > chi2 = 0.000 max = -| Corrected ZSCORE1968 | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag3 | 2713953 1405038 1.93 0.053 -.0039872 5467778 REP | 5.44733 3.890034 1.40 0.161 -2.176995 13.07166 LEVERAGE | -8.124337 4.180734 -1.94 0.052 -16.31842 0697502 SG | 8229195 6472408 1.27 0.204 -.4456492 2.091488 LNASSET | 2.256258 1.276139 -1.77 0.077 -4.757445 2449285 VSA220 | -.124944 2166484 -0.58 0.564 -.5495671 2996791 _cons | 34.65625 16.05512 2.16 0.031 3.188791 66.12371 -Instruments for first differences equation Standard D.lag3 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ZSCORE1968 Instruments for levels equation Standard lag3 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ZSCORE1968 -Arellano-Bond test for AR(1) in first differences: z = -1.80 Pr > z = 0.071 Arellano-Bond test for AR(2) in first differences: z = 0.28 Pr > z = 0.778 -Sargan test of overid restrictions: chi2(10) = 162.35 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 5.71 Prob > chi2 = 0.839 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 3.04 Prob > Difference (null H = exogenous): chi2(5) = 2.67 Prob > iv(lag3) Hansen test excluding group: chi2(9) = 5.01 Prob > Difference (null H = exogenous): chi2(1) = 0.70 Prob > chi2 = chi2 = 0.693 0.751 chi2 = chi2 = 0.833 0.403 64  Audit firm experience – Z-Score (3) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(6) = 87.33 avg = 5.60 Prob > chi2 = 0.000 max = -| Corrected ZSCORE1968 | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag3 | 3146703 0640501 4.91 0.000 1891344 4402063 EXP | 2178211 138451 1.57 0.116 -.0535379 4891801 LEVERAGE | -9.714998 2.961164 -3.28 0.001 -15.51877 -3.911223 SG | 1.050223 3895663 2.70 0.007 2866875 1.813759 LNASSET | 1.563534 8567322 -1.82 0.068 -3.242698 1156306 VSA220 | 0887887 1448346 0.61 0.540 -.195082 3726594 _cons | 23.18848 11.73286 1.98 0.048 1924948 46.18446 -Instruments for first differences equation Standard D.lag3 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ZSCORE1968 Instruments for levels equation Standard lag3 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ZSCORE1968 -Arellano-Bond test for AR(1) in first differences: z = -2.50 Pr > z = 0.012 Arellano-Bond test for AR(2) in first differences: z = 0.70 Pr > z = 0.486 -Sargan test of overid restrictions: chi2(10) = 171.28 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(10) = 5.97 Prob > chi2 = 0.818 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(5) = 3.93 Prob > Difference (null H = exogenous): chi2(5) = 2.04 Prob > iv(lag3) Hansen test excluding group: chi2(9) = 4.91 Prob > Difference (null H = exogenous): chi2(1) = 1.06 Prob > chi2 = chi2 = 0.560 0.843 chi2 = chi2 = 0.842 0.303 65  Audit rotation, audit reputation and audit firm experience – Z-Score (4) Dynamic panel-data estimation, two-step system GMM -Group variable: ID Number of obs = 1500 Time variable : Year Number of groups = 268 Number of instruments = 17 Obs per group: = Wald chi2(8) = 24.52 avg = 5.60 Prob > chi2 = 0.002 max = -| Corrected ZSCORE1968 | Coef Std Err z P>|z| [95% Conf Interval] -+ -lag3 | 2445554 169385 1.44 0.149 -.0874332 5765439 PERIOD_1 | -2.155463 2.55504 -0.84 0.399 -7.16325 2.852323 REP | 14.93425 11.9421 1.25 0.211 -8.471846 38.34034 EXP | -.4309542 4891456 -0.88 0.378 -1.389662 5277535 LEVERAGE | -2.876017 9.349647 -0.31 0.758 -21.20099 15.44895 SG | 2756211 1.210457 0.23 0.820 -2.096831 2.648073 LNASSET | -4.286837 3.12382 -1.37 0.170 -10.40941 1.835738 VSA220 | -.1580851 3279235 -0.48 0.630 -.8008033 4846331 _cons | 66.18323 44.10595 1.50 0.133 -20.26285 152.6293 -Instruments for first differences equation Standard D.lag3 GMM-type (missing=0, separate instruments for each period unless collapsed) L(0/1).ZSCORE1968 Instruments for levels equation Standard lag3 _cons GMM-type (missing=0, separate instruments for each period unless collapsed) DL.ZSCORE1968 -Arellano-Bond test for AR(1) in first differences: z = -1.45 Pr > z = 0.014 Arellano-Bond test for AR(2) in first differences: z = -0.34 Pr > z = 0.730 -Sargan test of overid restrictions: chi2(8) = 86.19 Prob > chi2 = 0.000 (Not robust, but not weakened by many instruments.) Hansen test of overid restrictions: chi2(8) = 4.54 Prob > chi2 = 0.806 (Robust, but weakened by many instruments.) Difference-in-Hansen tests of exogeneity of instrument subsets: GMM instruments for levels Hansen test excluding group: chi2(3) = 2.15 Prob > Difference (null H = exogenous): chi2(5) = 2.38 Prob > iv(lag3) Hansen test excluding group: chi2(7) = 3.74 Prob > Difference (null H = exogenous): chi2(1) = 0.80 Prob > chi2 = chi2 = 0.541 0.794 chi2 = chi2 = 0.810 0.371 66