Family Ownership, Earnings Informativeness, and Role of Audit Committees: An Empirical Investigation in India
Journal Title: Review of Economics & Finance - Year 2017, Vol 9, Issue 3
Abstract
This paper investigates the role and impact of audit committees on the relationship between family ownership and earnings informativeness. The sample set comprises of 368 Indian firms over a period of 6 years (2007-2012) with a panel dataset of 2208 firm-years. Earnings informativeness was measured through the relationship between accounting earnings and cumulative abnormal stock returns (CAR). Audit committee independence has statistically significant positive association with earnings informativeness in India. However, family firms exhibit lower earnings informativeness compared to widely held companies. The finding indicates information asymmetry among family firms despite the presence of audit committees. This finding supports entrenchment effect and affirms the type II agency issues of dominating verses minority shareholders among Indian companies. Hence, protection of minority rights assumes tremendous importance for regulators. Audit committee size had a positive impact on the level of earnings informativeness only in widely held companies. Audit fees had a positive impact, while consulting fees paid to auditors had a negative impact on earnings informativeness. This observation lends support to recent regulations restricting auditor engagement for non-audit services. Broadly, the results support the hypothesis that audit committees strengthen earnings informativeness among Indian family firms. The findings enable cross section of stake holders to appreciate the dynamics among governance mechanisms, concentrated control and their impact on the earnings informativeness.
Authors and Affiliations
Prasanna Krishna, Ramanathan Geeta, Arora Bharat
Keywords
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