External Auditing, Managerial Monitoring and Firm Valuation: An Empirical Analysis for India

Abstract

This article examines how external auditing and managerial ownership relate to firm valuation. It is argued that both external auditors (which serve as an external monitoring function) and managerial ownership (which serves as an internal monitoring function) affect firm value, while internal monitoring by managers and external monitoring by auditors were viewed as substitutes or complements. After controlling for the effect of exogenous variables, the results reveal the existence of a substitution monitoring effect between auditors and the managerial group. Additionally, firm valuation is found to be a significant determinant of managerial ownership. A disaggregated analysis of firms according to size and leverage suggests the existence of a complementary monitoring effect between auditors and managers, especially for low‐leveraged firms.

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