H2: Big 4 auditors moderate the SFC

H2: Big 4 auditors moderate the SFCF-DAC
relationship.
Sainty et al., (2002), Davis et al., (2003), Geiger
and Raghunandan (2002), Myers et al., (2003) and
Johnson et al., (2002) find that long tenure do not
reduce independence and normally, improve quality
of their audit work. However, in United States, and
some countries in Europe call for mandatory auditor
(Arrunada and Paz-Ares, 1997). However, Davis et
al. (2003) reach an opposite conclusion. They find a
positive relation between tenure and absolute
discretionary accruals and a negative relation
between tenure and absolute analyst forecast errors.
Chung, Firth, and Kim (2005) include audit tenure as
a main effect and as and interaction term in their
regression models. Due to the mix conclusions on
the effect of audit firm tenure on independency, they
do not determine the direction sign on the tenure
variable.
Institutional shareholders have the expertise to
analyze company performance. The implication is
that if the institutions own a large percentage of
companyûs shares, then they have incentive to
monitor managementûs actions, and they have the
power to affect or change corporate actions and
decisions. When institutional investors have
substantial shareholdings, it is difficult for them to
sell shares immediately at the prevailing price. This
lack of liquidity means investment institutions
have incentives to closely monitor companies with
high SFCF. Supposing other things being equal,
companies with substantial institutional shareholders
become less able to engage in opportunistic
earnings management. Chung, Firth, and Kim (2005)
assume that the monitoring activities of institutional
shareholders will obscure management from using
income-increasing DAC. The way of inhibiting the
actions of management is the threat of legal action
against managers taken by institutional investors.
Institutional investors have the ability to remove
managers if they believe the managements are
using DAC to hide the earnings impact of their
opportunistic actions. Institutional shareholders will
more closely monitor management and
managementûs accounting choices if there are high
agency costs. Institutional shareholders will therefore
impose more monitoring when free cash flow is high,
which leads to the third hypothesis.