This paper tests two hypotheses that examine whether choice of auditor can mitigate the agency costs associated with low management ownership. Based on the Warfield et al. {1995) paper, firms with low management ownership are expected to be associated with poorer earnings informativeness and higher discretionary accruals. However, a higher quality auditor would improve earnings quality, and this improvement would he more dramatic for potentially high-agency-cost (i.e.. low-management-ownership) firms, since one way in which an auditor improves earnings quality is by reducing contracting-driven accruals.
The first hypothesis predicts that higher quality auditors are expected to weaken the positive association between earnings Informativeness and management ownership. The second hypothesis predicts that higher quality auditors will weaken the negative association between management ownership' and the magnitude of discretionary accruals.
The inquiry into the relationship between countries’ trade policy and their subsequent economic growth has two branches. The first seeks to relate cross-country differences in openness to cross-country variation in GDP growth. The second focuses on the microeconomic link between firm exporting and firm productivity. This paper uses several new firm-level models of international trade to explore a third channel, the evolution of industry productivity resulting from a reallocation of activity across firms in response to changes in trade costs.
An increase in aggregate industry productivity as a result of falling trade costs is a key feature of three heterogeneous-firm, general equilibrium trade models recently introduced by Bernard et al. (2000), Melitz (2002), and Yeaple (2002). These models emphasize productivity differences across firms operating in an imperfectly competitive industry consisting of horizontally differentiated varieties. In all three models, the existence of trade costs induces only the most productive firms to self-select into exporting. As trade costs fall, industry productivity rises due a reallocation of activity across firms: lower trade costs cause low productivity non-exporting firms to exit and high productivity non-exporters to increase their sales through exports, thereby increasing their weight in aggregate industry productivity. An important feature of these models is that the increase in aggregate productivity is not a result of faster firm productivity growth from exporting.
Earnings growth is a primary determinant of equity value. Firms may deliver earnings growth either by improving the profitability of capital (i.e., the accounting rate of return on invested capital) or by increasing the capital base on which that profitability is earned. Economic theory suggests that earnings growth achieved through incremental capital investments is less valuable to existing shareholders than growth obtained by improving profitability. Unlike improvements in profitability, increases in capital generate an incremental cost of capital.
