Corporate governance and firm performance: A comparative analysis of auditing problems

Abstract

The recent financial crises have created a new debate about comparison and convergence of different systems of corporate governance. In particular, they have underlined poor efficiency of rule structures to achieve a good relationship between different stakeholder's rights. In line with many studies of corporate governance that emphasize the manager-stakeholders relationship as explained by agency theory, in this paper, I analyse the role of auditing as an incentive device to reduce contractual or transaction costs related to asymmetric information.Considering as a benchmark the recent US Sarbanes Oxley Act of July 2002. I describe a set of auditing principles by comparing common and civil corporate laws. First, by using multiple correspondence analysis on six countries and twenty-seven dummy variables on auditing rules, I identify the main variables that form the auditing index. Second, I test the hypothesis that a suitable rule structure can improve the capability of financial markets to estimate the fair value of firms. In particular, I analyse the problem of the effects of direct and indirect monitoring rules for managers on the market value of public companies. The results obtained highlight a different relationship between auditing principles and firm performance from that expected on the basis of the legal framework.