IMPACT OF CORPORATE POLITICAL CONNECTIONS AND AUDIT QUALITY ON AGENCY COST: EVIDENCE FROM PAKISTAN

The study examines the impact of corporate political connections and audit quality on agency cost in Pakistan. The institutional environment of Pakistan is weakened over time by giving raise to corruption, bribery and political lobbying. This study examines the impact of political connections on asset utilization ratio which has shown that political connected firms face high agency cost as they do not use their assets efficiently to generate revenue. Agency cost is proxied with asset utilization ratio which is inverse proxy to agency cost. Impact of auditor expertise, auditor independence, meeting frequency of audit committee, audit report lag and big4 audit firms on agency cost shows that audit quality is a significant mechanism to control agency cost. Whereas it is determined that growth of politically connected firms is low and older firms exhibit lower agency cost. The results can be great interest for auditors, policy makers and owners of the firms