Three Essays on Audit Report Lag

Abstract

The FASB’s conceptual framework emphasizes the relevance of financial information as one of the fundamental qualities of financial reporting. The research shows that financial information loses its relevance when it is not timely. The literature suggests that an audit report lag, hereafter ARL, determines the timeliness of financial information, and the market responds negatively to delays in the disclosure of financial information. Thus, ARL is an exciting subject to stakeholders.

In this three-part dissertation, I investigate the impact of executive tournament incentives, managerial entrenchment, and extreme cuts in CEO compensation on ARL. In the first essay, I examine the association between ARL and executive tournament incentives. I use four different measure of tournament incentives to test my hypothesis. Firstly, I measure tournament incentive as the difference between the CFO compensation and the CEO compensation. Secondly, I measure tournament incentive as a ratio of the CEO compensation to the sum of the CFO compensation and the CEO compensation. Using a subsample, I measure tournament incentive as the compensation difference between the CEO compensation and the median compensation of the top five executives. I also measure tournament incentive as the compensation difference between the CEO compensation and the mean compensation of the top five executives of the firm. I find a negative association between tournament incentives and ARL indicating that strong tournament incentive results in shorter ARL.

In the second essay, I examine the association between ARL and managerial entrenchment. My proxy for managerial entrenchment is the entrenchment index (EINDEX) as constructed by Bebchuk et al. (2009). The results of the study show a significantly positive association between ARL and the EINDEX. I also examine the association between ARL, and the individual provisions used to create the EINDEX. Bebchuk et al. (2009) use staggered boards, golden parachutes, and poison pills along with the supermajority requirements to amend the corporate bylaws and the charter, and a supermajority requirement for mergers to create the EINDEX. The results also show that staggered boards, golden parachutes, and supermajority requirement to amend the corporate bylaws is positively associate with ARL. Additionally, the results show that supermajority requirement to amend the corporate charter negatively associates with ARL.

In the third essay of this dissertation, I examine the association between ARL and extreme cuts in CEO compensation. Consistent with the literature, I define extreme cuts as those of 25 percent or more in CEO compensation. Using two different methods to operationalize the extreme cut in CEO compensation, I find no evidence to suggest any association between extreme cut in CEO compensation and ARL.