• Evidence on the Impact of Internal Control over Financial Reporting on Audit Fees

      Garas, Samy; Gaber, Mohamed; Lusk, Edward J. (2019-06-30)
      Introduction: Circa 1992, the dot.com sector created an irrational stock-trading market where the usual “financial” profiles of: Liquidity, Cash Flow from Operations, and Revenue Ggeneration were replaced by Ponzi-esque mayhem. To stabilize the markets, the Public Company Accounting Oversight Board [PCOAOB] required a second audit opinion: the COSO Opinion on the adequacy of management’s system of Internal Control over Financial Reporting: [ICoFR]. Study Focus: Three COSO-[ICoFR] designations are now required as public information: (i) A “clean” opinion [Is Effective], (ii) Deficiencies are noted, and (iii) Weaknesses reported. Our research interest is to determine, for a panel of randomly selected firms traded on the S&P500 for a eleventen-year period: 2005 to 2015, the nature of the effect that the COSO deficiency reporting protocol has on (i) Audit Fees and (ii) the Market Cap of traded firms. Method: To this end we collected, using the Audit Analytics [WRDS] database, various categories of reported Audit Fees and also Market Cap information. This random sample was classified into two sets: the first group: Is Effective SEC 302 Designation and No COSO issues & the second group: Is Not 100% Effective for which there were SEC 302 Deficiencies or Weaknesses noted. Results: Inferential testing indicates that failure to attend to the PCAOB-COSO imperatives results in a relational where there are higher Audit Fees and a slippage of the firm’s Market Cap compared to the Is Effective Group. The PCAOB’s protocol to require the Audit of the firm’s ICoFR system and make that evaluation public information seems to be an excellent corrective “Carrot and Stick”.
    • The Graph Theoretical Approach to Bankruptcy Prediction

      Choe, Kwangseek; Garas, Samy (2021)
      This paper examines the applicability of the graph theoretical approach to bankruptcy prediction. Various statistical techniques have been used to predict bankruptcy including univariate analysis, multivariate discrimination analysis, logit model, probit model, and neural networks. This paper employs the graph theoretical approach to bankruptcy prediction. The empirical findings confirms the validity of the proposed method for predicting bankruptcy. The proposed method in this paper provides an insight into the development of a new approach to the assessment of financial solvency of a company. This paper contributes to the literature by introducing a new approach to bankruptcy prediction.
    • The Impact of CEOs’ Incentives for Risk-Taking or Risk-Aversion on Corporate Performance: Using CEO Vega and CEO Delta as Incentive Measures

      Garas, Samy; Kienpin, Tee; Lee, Chuo-Hsuan (2022)
      This article has a two-fold purpose. First, we investigate whether the CEOs’ risk-taking incentives are associated with better concurrent firm performance. Second, we examine the impact of gender on the aforementioned relationship. We find solid empirical evidence that CEOs’ risk-aversion incentive, as represented by a higher CEO delta, can be linked to better concurrent firm performance such as return on assets (ROA) and Market-to-Book Value (MTB) ratio. By contrast, we find that the risk-taking incentive, as represented by CEO vega, has no significant impact on ROA, but has a significant impact on MTB ratio only among the group of CEOs with larger share ownerships. Furthermore, we research on the same incentives using only female CEOs in our sample. Our panel-data findings indicate that female CEOs on average possessed a lower CEO delta (low risk aversion) and a lower CEO vega (risk-taking incentive) in their compensation packages when compared with their male counterparts. Taken together, these two risk incentives; are linked to a lower concurrent ROA and MTB value. Our findings also indicate that the aforementioned positive relationship between CEOs’ risk- aversion incentive (as measured by CEO delta) and firm performance (as measured by ROA) are less pronounced when a CEO is female. This implies that a female CEO is less likely to increase the firm’s ROA relative to a male CEO, given the same sensitivity of personal wealth to stock price change (i.e., the same CEO delta).
    • The Impact of Ruling Family Board Members on the Performance of Commercial Banks

      Kienpin, Tee; Garas, Samy (Association for Accountancy & Business Affairs, 2021)
      We examine the impact of royal family involvement in the ownership and strategic management of commercial banks within the Gulf Cooperation Council (GCC) region. Existing finance literature has examined the impact of board members with political connections on bank performance to find mixed evidence of whether such connections have a positive or negative impact. However, such empirical studies have not been applied to the commercial banks of the GCC region. Our empirical analysis uses four separate metrics of performance to examine what influence board membership, board chairmanship and bank ownership shares by a royal family member has on bank performance. Our panel data analysis of GCC commercial bank data across six countries from 2013 to 2018 reveals that all three potential royal family roles exert a positive influence over GCC commercial bank performance. We derive these empirical results using relevant control variables at both the firm level and the industry level. Furthermore, we apply a system generalized moments of methods specification to our sample and find that these results are invariant to various specification robustness checks. Our results appear to support the Resource Dependency Theory (RDT), where the commercial banks rely on external resources to enhance financial performance.