Investigation of the relationship between ownership concentration and ...

Scholar Journal

Journal of Science and Today's World Journal home page: http://www.journalsci.com

ISSN 2322-326X

2016, volume 5, issue 3, pages:79-85

Research Article

Investigation of the relationship between ownership concentration and management ownership with independent auditor's opinion in the listed companies in Tehran Stock Exchange

Adel Nikoozad *1, SeyyedHossein NaslMousavi 2 1 MSs.Student of Accounting , University College of Rouzbahan ,Sari , Iran. 2. Department of Accounting , Qaemshahr Branch , Islamic Azad University ,Qaemshahr , Iran. ARTICLE INFO Article history: Received 7 January2016 Received in revised 29Januaryr 2016 Accepted 25 February2016 Published 28 February2016 Keywords: ownership concentration, management ownership, independent auditor's opinion

ABSTRACT The impact of ownership concentration on the type of independent auditor’s opinion in Tehran Stock Exchange was investigated in this study. The statistical population of this research consisted of 61 companies during the years 2008 to 2013. Logistic regression was used to test the research hypothesis. The results show that there is significant relationship between ownership concentration and independent auditors' unqualified opinion. Moreover, there is significant relationship between management ownership and independent auditors' unqualified opinion. The relationship between firm size, return on assets and leverage ratio is significant with auditors' opinion. No significant relationship observed between the type of ownership of the audit firm and independent auditors' opinion.

*correspondence should be addressed to Adel Nikoozad. MSs.Student of Accounting , University College of Rouzbahan ,Sari , Iran. Tell: +98: 911-14-8372 Fax: +98 Email:

[email protected]

© Copyright 2016 Adel Nikoozad et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Introduction Dynamic capital markets depend on investors’ confidence to the quality of financial reporting. After financial scandals of companies such as Enron and WorldCom in the early year 2000 and the financial crisis, the framers of the laws and regulations divert their attention to increasing the quality and more transparency of financial reporting .Efficient capital markets that require high-quality financial reporting, benefit investors by the optimal allocation and capital attraction .To ensure the quality and reliability of the information provided by the company, an independent character from company is required to comments about this information. Independent auditors have comment about the information utility and quality. For many years in past, economists assumed that, entire groups related to a corporation act for a common goal; but in the last thirty years, economists posed many cases of conflict of interest between groups and how to deal with these conflicts. Corporate governance is not only important for companies’ managers who want to be aware of the corporate governance structure and its compliance with procedures and regulations, but it is also attractive 79 | P a g e

for the market participants who are interested in investment, for the purpose of applying corporate governance is a framework whereby it can provide a proper balance between Discretion of managers and interests of beneficiaries including shareholders [1]. A desirable system of corporate governance that can be created with concentrated ownership, leads to confidence that the companies use their assets efficiently, also it will considers the interests of a wide range of stakeholders and community in which they operate. Concentrated ownership structure can be considered as a desirable mechanism of corporate governance. Ownership concentration is considered as a mechanism for corporate governance in many studies. Corporate governance was introduced as a discussion that focused on the issue of firms’ strategy and shareholder rights and its role is reducing conflicts of interest between shareholders and managers. This conflict of interest is often associated with agency problems that is due to two main reasons: first, difference in the goals and preferences of the participants in the enterprise and second, Participants’ incomplete information of

J. Sci. Today's World, 2016, volume 5, issue 3, pages: 79-85

each other’s performance, knowledge and preferences. Existence of different ownership structures as corporate governance mechanisms can have different effects on companies [2]. Conflicts of interest between managers and shareholders gives special importance to the audit to resolve this conflict. Audit as an efficient mechanism ensures this confidence to the shareholders that whether managers in corporate management have acted in the interests of shareholders or not. Therefore, audit’s work is ensure shareholders and other interested parties that face with company[3]. When the accounting information has good quality and reliability, auditors provide unqualified opinion on the financial statements. Factors that change the utility and quality of accounting information are effective in auditors’ opinion. Research literature In this study, the potential relation between the percentage of ownership concentration and the percentage of management ownership with the independent auditors' opinion was investigated. Previous researches investigated different things that may affect the quality of information and therefore independent auditors' opinion. The research of Szewczyk et al [4] showed that whatever the ownership percentage of unbound managers in the board of directors and audit committee is lower, the likelihood of distortion occurrence in reports prepared by the company and therefore providing an implausible opinion for issued financial statements will increase. Yang et al [5] investigated the relationship between the ownership concentration and informational asymmetry between aware and unaware investors and have discovered several mechanism that reduces this relationship. Using a large sample of Korean companies with highly concentrated ownership structure, they found that the level of informational asymmetry increases with ownership concentration. They also showed that the ownership concentration has positive relation with informational asymmetry through an increase in the relative amount of informed transactions. Increasing informational asymmetry can increase the possibility of receiving implausible opinion by the auditors. Rahman Khan et al [6] investigated the effect of concentrated ownership in corporations on audit fees in Bangladesh as an example of emerging economies. They examined the relationship between audit fees and ownership concentration of the corporations. Their results showed a significant negative relationship between institutional ownership concentration and audit fees. These findings indicate that in Bangladesh when companies are under the influence of institutional shareholders, they pay lower fees; but they found negative but non-significant relationship for public shareholders. The results suggest that the pattern of ownership of the corporations may be an important factor in explaining lower audit fees in Bangladesh. Jabar Zadeh et al (2013) investigated the relationship between independent auditors' opinion, corporate governance and quality of financial reporting in Tehran Stock Exchange (TSE). In their study, 90 business units during 2012-2013 were analyzed. A questionnaire based on the TSE corporate governance guidelines was used to measure corporate governance. Dechow and Dichow model was used to measure the quality of information. The results indicated that in companies with strong corporate governance level as well as high quality accounting information, the ratio of unqualified opinion is not more than 80 | P a g e

implausible opinion. However, in companies with low and medium quality of corporate governance and the quality of accounting information, implausible opinion is presented more than an unqualified opinion. The results also show strong and positive correlation between corporate governance and accounting information quality. Maria and Charalambos (2014) investigated the relationship between the auditor's opinion and earnings management, which was measured by discretionary accruals. They divided qualified opinion into two parts including modified opinion due to unreliability of going concern and modified opinion for other reasons. The results indicate that the auditor's opinion is not associated with earnings management. Financial indices of customers, such as profitability and firm size are determinants of the decision about auditor's going concern opinion. The auditors' decision to provide the modified opinion for other reasons is explained by the type of opinion presented in the previous year. Ramezani et al [7] from another point of view investigated the relationship between the type and ownership concentration and independent auditors' opinion. They studied the role of type and ownership concentration on the reduction of condition paragraphs in audit report of private institutions. Their study period was from 2006 to 2012 and studied sample was 73 companies in the Tehran Stock Exchange. These business units were investigated by 48 private audit firms that were a member of certified Public Accountants. They tested the hypotheses using logistic regression. The results showed that for business units with larger major shareholders, there is more possibility to receive less condition paragraphs. Also for business units that its major shareholder are individuals, possibility to receive audit report with more condition paragraphs before comment paragraph will increase. Chen et al [8] examined the relationship between the modified opinion (MAO) in private debt contracting. They used condition clauses to divide the opinion into nonuniformity opinion as a result of accounting changes or restatement and inadequacy opinion provided because of uncertainty or going concern (GC). Using debt contracts of business units with the modified opinion (MAO), compared to the debt issued in the year after receiving an unmodified opinion, they found that debt issued after receipt year of the modified opinion has a relation with the release of higher interest, less financial contracts, more public contracts, much less debt and more possibility to draw up contracts requiring collateral. They also found that the impact on debt issuance is different given to the type of modified opinion. Theoretical bases and development of research hypotheses Existence of an optimal corporate governance system assures that the firms use their assets effectively as well as they consider interests of a large number of stakeholders and community [9]. According to the research literature, a feature of corporate governance is ownership concentration, which will enhance the quality of financial information by monitoring the activities of managers and limiting their opportunism. It is thought when the ownership of the company is in the hands of major shareholders and a few force(concentrated ownership), major shareholders actively monitor management performance and have effect on the accounting policies


selection by management and also the strategy of providing information of financial statements [10,11]. Concentration in the corporate ownership that arises from the absolute control of major shareholders on corporate governance can reduce agency issues, because major shareholders by having enough information can have better control over management performance [12]. So when ownership is concentrated, information quality increase and there is more possibility that the company receive an unqualified opinion. From agency theory perspective, the presence of unbound and independent managers in the board of directors of companies who have the expertise, independence and necessary legal authority to monitor the company's performance can be a potential powerful mechanism of corporate governance [2]. Based on Jensen and Meckling theory (1976), managerial ownership will reduce the agency problem between shareholders and managers since it aligns the interests of managers and shareholders. It seems that this issue motivates the managers to a better control and performance. In classification of organizations' structure, existence of high managerial ownership reduces the gap between ownership and management and information asymmetry will be lower than other organizations. In addition, compared to other managers, managers who have invested in the company under their management, avoid high-risk decisions; thus reducing information asymmetry and reducing high-risk decisions cause to produce more reliable and higher quality information; as a result, in the companies with managerial ownership structure, there is more possibility that auditors present unqualified report[13]. Research literature indicates a positive role of concentrated ownership, management ownership in active monitoring on management performance of business unit. [4,14] so companies that have more concentrated ownership, provide higher quality of accounting information; therefore the risk of fraud and infraction will decrease by increasing the quality of financial information. By enhancing the quality of financial information, presentation of unqualified opinion by auditors seems reasonable. Due to the mentioned cases, in this study the relationship between ownership concentration and management ownership was investigated as mechanisms for corporate governance and the type of independent auditors' opinion. The relationship between ownership concentration, management ownership, the quality of financial reporting and independent auditors' opinion is shown in Figure (1): Figure 1: The relationship between ownership concentration, management ownership and independent auditors' opinion

independent auditors' opinion

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quality of financial reporting

ownership concentration management ownership

Based on the theoretical foundations, existence of ownership concentration in the company will cause active monitoring on management performance and also limits their opportunism; on the other hand ownership concentration will reduce conflicts of interest between owners and managers (Jensen and Meckling, 1976). As a result, when the ownership is concentrated, information quality will increase and the possibility that auditors toward financial statements present an unqualified opinion will increase. Thus, the first hypothesis is as follows: First hypothesis: There is significant relationship between ownership concentration and independent auditors' opinion. As mentioned in the theoretical bases, management ownership reduces information asymmetry, high-risk decisions, increases the quality of information and reduces the uncertainty [15] as a result, in the companies with managerial ownership structure, there is more possibility that auditors present unqualified opinion. With regard to the above cases, second hypothesis is as follows: The second hypothesis: There is significant relationship between management ownership concentration and independent auditors' opinion. Research methodology and data collection In this study, consolidated patterns have been used to estimate the coefficients and hypotheses testing. since keeping some variables from the structure of the models Leads to inefficiency in the estimations of econometric models, consolidated data method, which is formed using a combination of time series data and cross-sectional data, shows the effect of this type of unconsidered or unmeasurable variables better than cross-sectional data during a year or time series data for a period of time. Consolidated data include past trends and makes sure in terms of keeping the mobility of the variables. Statistical universe in this study is the listed companies in Tehran Stock Exchange and statistical sample was extracted among these companies. The systematic elimination method is used to select the sample. So that among all the companies listed in Tehran Stock Exchange, companies that have all the following conditions were selected: -Given companies in the time range of research should be listed in Stock Exchange. -The end of their fiscal year should be December 31. -Over the span of research should have ownership change. -Their given data should be available. Research variables and method of calculating them A:dependent variable In this study, the auditor's opinion has been selected as the dependent variable. The auditor should comment whether the financial statements in terms of all important aspects desirably prepared according to accounting standards or not. Auditor to determine the type of opinion should conclude whether he achieves reasonable assurance about lacking or not lacking financial statements from important distortions caused by


fraud or error or not. In this assessment, qualitative aspects of the entity's accounting practices including possible signs of predilection in management's judgment should be noted (Auditing Standards, 2012). If auditor's opinion is unqualified, the number is one and otherwise is zero. Explanatory variables There are two explanatory variables in this study included the ownership concentration and managerial ownership concentration which are defined and calculated as follows. Concentration of ownership (OWNCON) It equals to the sum of institutional ownership concentration and managerial ownership concentration. OWNCON=∑

2 I +∑

ownership concentration and independent auditor's opinion" To test this hypothesis, the regression of equation (4) is used: Model (2): AO = β0+ β1 OWNMMTHit + β2 SIZEit+ β3 LEVit+ β4 ROAit+ β5 BIGit+ eit Equation (4) Data Analysis and Results Descriptive statistics of independent presented in table (1).

Me an

Equation(1)

OWNMTH=∑

i

2

Equation (2)

In this equation OWN shows stock percentage of each managerial shareholder of firm i and n is the total number of managerial shareholders of firm i. C: control variables According to the past researches, variables that are likely to affect the auditor's opinion were considered as control variables. Company leverage (LEV) is measured using the debt-toequity ratio. For firm size variable (SIZE) the natural logarithm of the company's assets is used. To measure the company's profitability (ROA) the ratio of net profit to the company's assets is used ; also to measure the type of audit firm (BIGN) dummy variable is used; if the audit organization performed the auditing of company, the number is one and otherwise is zero [11]. Because of using dependent variable in the form of one and zero to estimate and test hypotheses, logistic regression was used and based on the research background and theoretical bases; the dependent, explanatory and control variables were selected. The first hypothesis is stated as follows: "There is a significant relationship between ownership concentration and independent auditor's opinion" To test this hypothesis, the regression of equation (3) is used: Model (1): Equation (3) AO = α0+ α1 OWNCONit + α2 SIZEit+ α3 LEVit+ α4 ROAit+ α5 BIGit+ eit The second hypothesis is as follows: "There is a significant relationship between management

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are

Table (1): Descriptive statistics

2 i

Managerial ownership concentration In this type of ownership, the largest stock is in the hands of managers and the board family. Ownership concentration in this model is measured using Herfindahl-Hirschman index. Thus, for calculating OWNTH in firm i at the end of year t, stock percentage of each managerial owners reached to exponent 2 and are summed together:

variables

Med ian

Maxi mum

Mini mum

stand ard devia tion

skew ness

owner ship concen tration

0/3 3

0/2 8

0/96

0/000

0/25

0/388

manag ement owner ship

0/2 6

0/2 0

0/96

0/000

0/25

0/019

firm size

5/6 43

5/5 99

7/276

4/265

0/54 5

0/504

Return on assets

0/0 97

0/0 80

0/397

0/124

0/09 4

0/657

Financ ial levera ge

0/2 4

0/ 15

0/98

0/0 00

0/2 2

0/3 34

Elong ation

2/31 2

2/31 2

2/50 1

1/55 1

2/6 51

To interpret the results obtained from regression model estimation, we must consider a violation of classical assumptions of the regression. There is often unequal variants problem in logistic regression model; therefore, regression is estimated by assumption of unequal variants existence so that obtained results be valid. To test existence of multicollinearity among explanatory variables, variance inflation factor (VIF) was used. A: The results of the first hypothesis The first hypothesis is stated as follows: There is no significant relationship between the percentage of ownership concentration and independent auditors' opinion. The results of testing the first hypothesis are presented in Table (2). Table (2): The results of testing the first hypothesis


Variables

Coeffi cients

Constant C

2/31 7452

Percentage of ownership concentration OWNCON Audit firm ownership BIGN Logarithm of total assets Size

Stand ard devia tion

Z Stat istic

1/81 2035

1/ 27 89 22 3/ 43 41 61 1/ 16 06 90 3/ 03 03 05 4/ 52 62 08 2/ 69 53 71

2/10 2785

0/61 2314

0/40 5541

0/34 939 7

0/937 022

0/30 9217

Return on assets ROA

7/012 341

1/54 9275

The ratio of long-term debt to the total assets LEV

0/059 048

0/02 1190 7

pseudo-R2

0/156584

Pro babi lity (Pr ob)

The results of the second hypothesis test are presented in Table 3. Table (3): The results of the third hypothesis test

VIF

Variables

Standa rd deviati on

Z Statis tic

Proba V bility (Prob )

Constant C

2/6123 80

1/702 955

1/53 4028

0/125 0

Percentage of management ownership OWNMTH Audit firm ownership BIGN Logarithm of total assets Size

1/9129 65

0/541 487

3/53 2796

0/000 4

1/080 0

0/3354 48

0/352 880

0/95 0601

0/341 8

1/120 5

0/9343 61

0/300 013

3/11 4403

0/001 8

1/033 8

Return on assets ROA

6/5953 35

1/551 596

4/25 0677

0/000 0

1/035 9

The ratio of long0/020 term debt to the 0/0608 221 3/00 total assets 24 7914 LEV pseudo-R2 0/156584 Prob (LR statistic)

0/002 6

1/013 5

0/2 009

0/0 006

1/0367

0/2 458

1/0819

0/0 024

1/276

0/0 000

1/0365

0/0 070

1/0144

Prob (LR statistic)

0/0000

As seen in the table, coefficient amount of percentage of ownership concentration (2/102785) indicates a positive relationship between the percentage of ownership concentration and the auditor's opinion. Given that the probability of variable of concentrated ownership is (0/0006) thus the first hypothesis at a significance level of 0/01 is confirmed. The results also showed a positive and non-significant relationship between ownership type of audit firm and the auditors' opinion. For the variable of firm size, relationship between firm size and auditor's opinion is negative and this relationship is significant at a significance level of 0/01. The relationship between returns on assets and auditor's opinion is positive and significant at 0/01 level. Moreover, the relationship between the ratio of long-term debt to assets and the auditor's opinion is negative and significant at 0/01 level. Statistics of pseudo-R2 is (0/15861). Low value of pseudo-R2 in the logistic regression model which is a subset of limited dependent variable models is common (Brooks, 2008, p. 540). As seen in the table, the value of variance inflation factor is less than 2 which shows that multicollinearity between independent variables is in the acceptable threshold (Gujarati, 2008). Summaries of the research results are shown in Table 4. B: The results of the second hypothesis The second hypothesis is stated as follows: There is significant relationship between the percentage of management ownership and independent auditors' opinion.

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Coeffici ents

IF

0/0000

As seen in the table, coefficient amount of percentage of management ownership (1/912965) indicates a positive relationship between the percentage of management ownership and the auditor's opinion. Given that the probability of variable of management ownership is (0/0004) thus the first hypothesis at a significance level of 0/01 is confirmed. The results also showed a positive and non-significant relationship between ownership type of audit firm and the auditors' opinion. For the variable of firm size, relationship between independent variables and the dependent variable is negative and this relationship is significant at a significance level of 0/01. The relationship between returns on assets and auditor's opinion is positive and significant at 0/01 level. Moreover, the relationship between the ratio of long-term debt to assets and the auditor's opinion is negative and significant at 0/01 level. Statistics of pseudo-R2 is (0/156584). As seen in the table, the value of variance inflation factor (VIF) is less than 2 which shows that multicollinearity between independent variables is in the acceptable threshold (Gujarati, 2008). In addition, given that the probability of LR statistic in this model is (0.000), it can be said that this model was significant at 99% confidence level and have high validity. Summaries of the research results are shown in Table 4. Table (4): Summary of results Research hypothesis There is a significant relationship between the percentage of ownership concentration and independent auditors' unqualified opinion

Coefficient

Probability

Results

2/102

0/0006

Hypothesis approved


There is a significant relationship between the Percentage of management ownership and independent auditors' unqualified opinion

1/912

0/0004

Hypothesis approved

Discussion and conclusion A: The first hypothesis When corporate ownership is in the hands of major shareholders and a few force (concentrated ownership), major shareholders actively monitor the performance of management and affect the accounting policies selection by management and also the strategy of providing information of financial statements [10,16]. The results of the second hypothesis confirms above theory. Generally, when corporate ownership is in the hands of a few force, they cause to increase the quality of information and reliability of financial statements by active monitoring of the management performance and providing financial statements and as a result probability of receiving unqualified report by auditors increases. Given that high quality transparent and reliable information is essential component of accountability and informed economic decision-making and is the unique requirements of economic growth and development in the private and public sectors, certainly making economic decisions and optimal allocation of resources is not possible without reliable information. Existence of concentrated ownership structure in companies as a corporate governance mechanism, with active monitoring on management and corporate performance cause to reduce information asymmetry and increase the quality and reliability of the information. As a result, investors use information with more confident and make more informed decisions that ultimately led to the growth and development of capital market and benefit to society. B: The second hypothesis The results of the second hypothesis suggest that increase in management ownership enhances the probability of receiving an unqualified opinion by the auditors. In other words, existence of managers in the corporate ownership structure increases the quality of information and increases the probability of receiving unqualified report. These results confirmed the Jensen and Meckling theory (1976). It seems that managerial ownership will reduce agency problem between shareholders and managers since it aligns the interests of managers and shareholders and this issue is an incentive to lead the managers to better control and better performance. In classification of organizations' structure, existence of high managerial ownership reduces the gap between ownership and management and information asymmetry will be lower than other organizations. In addition, managers who have invested in the company under their management compared to other managers avoid highrisk decisions; thus reducing information asymmetry and reducing high-risk decisions cause to produce more reliable and higher quality information; by increasing the quality and reliability of information, increasing the likelihood of providing unqualified opinion by independent auditors is reasonable [15].

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