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Audit quality, political connections and information asymmetry: evidence from banks in gulf co-operation council countries

Abiot Tessema (College of Business, Zayed University, Abu Dhabi, United Arab Emirates)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 30 April 2020

Issue publication date: 16 October 2020

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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.

Keywords

Acknowledgements

I would like to thank the Editor, Prof. Alfred Yawson, and anonymous reviewers for their guidance and constructive comments. Special thanks to Mazen Mohammad Alakkad for data collection assistance.

Citation

Tessema, A. (2020), "Audit quality, political connections and information asymmetry: evidence from banks in gulf co-operation council countries", International Journal of Managerial Finance, Vol. 16 No. 5, pp. 673-698. https://doi.org/10.1108/IJMF-01-2020-0027

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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