Does Audit Oversight Quality Reduce Insolvency Risk, Systematic Risk, and ROA Volatility? The Role of Institutional Ownership

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

The paper investigates the impact of audit oversight quality on various measures of firm risk, including bankruptcy risk, systematic risk, and return on assets (ROA) volatility. The study uses a sample of U.S. pharmaceutical and energy firms from 2010-2022 and employs panel data fixed effects regressions to examine the relationship between audit oversight quality and firm risk. The findings suggest that audit oversight quality is associated with reduced systematic risk and ROA volatility, but not bankruptcy risk. The study also finds that institutional ownership moderates the relationship between audit oversight quality and firm risk, further reducing systematic risk and ROA volatility.

However, I have several comments on this paper:

Major comments:

1. The paper's theoretical framework could be more comprehensive and nuanced. While agency theory is presented as the primary theoretical basis, the paper could benefit from incorporating other relevant theories, such as institutional theory or resource dependence theory, to provide a more holistic understanding of the relationship between audit oversight quality and firm risk. For example, institutional theory could explain how audit oversight quality is influenced by external pressures and norms, while resource dependence theory could shed light on how audit committees leverage their resources and relationships to mitigate firm risk.
2. The hypotheses could be more specific and testable. For instance, Hypothesis 1, which states that audit oversight quality reduces bankruptcy risk, is not supported by the findings. The authors could refine this hypothesis by considering the possibility of a non-linear relationship or exploring the impact of different dimensions of audit oversight quality on bankruptcy risk. Additionally, the hypotheses related to systematic risk and ROA volatility could be more clearly linked to the theoretical framework and prior empirical findings.
3. The methodology section lacks sufficient detail and clarity. The rationale for choosing pharmaceutical and energy firms as the sample could be better explained. The authors could also provide more information on the data collection process, including how the variables were measured and calculated. For example, how were the three measures of audit oversight quality constructed? How was institutional ownership measured? More transparency in the methodology would enhance the replicability of the study.
4. The interpretation of the results could be more in-depth and critical. While the authors report the statistical significance of the findings, they could delve deeper into the economic significance and practical implications of the results. For example, what is the magnitude of the effect of audit oversight quality on systematic risk and ROA volatility? Are these effects economically meaningful for investors and other stakeholders? Additionally, the authors could discuss the potential mechanisms through which audit oversight quality and institutional ownership interact to reduce firm risk.

Minor comments:

1. The introduction could be more concise and focused. While it provides an overview of the research topic, it could benefit from a clearer statement of the research problem, objectives, and contributions.
2. The literature review could be more structured and organized to better highlight the gaps in the literature that the current study aims to address. The authors could also provide a more critical analysis of prior research, identifying inconsistencies and limitations that the current study seeks to overcome. Please cite:  Elmarzouky et al., 2022. Do key audit matters signal corporate bankruptcy? Journal of Accounting and Management Information Systems. And, Elmarzouky, et al., 2024. Key audit matters: a systematic review. International Journal of Accounting, Auditing and Performance Evaluation.
3. The discussion section could be expanded to explore the implications of the findings for theory and practice. The authors could discuss the limitations of the study in more detail and suggest avenues for future research. They could also highlight the practical implications of the findings for companies, investors, and regulators.
4. The conclusion could be more impactful by summarizing the key findings and contributions more concisely and highlighting the implications of the research for practice and policy. The authors could also reiterate the limitations of the study and suggest directions for future research.

Comments on the Quality of English Language

Please proofread the paper.

Author Response

Dear Reviewer 1,

Please see the attached file that lists changes made. The changes are in yellow in the manuscript.

Author

Author Response File: Author Response.docx

Reviewer 2 Report

Comments and Suggestions for Authors

“Does Audit Oversight Quality Reduce Bankruptcy Risk, Systematic Risk, and ROA Volatility? The Role of Institutional Ownership” is an interesting study that uses the mention of audit committees in company reports as a proxy for determining the role of the audit committee in oversight and corporate decision making.  The decision to not only use the frequency of the term “audit committee” but also the number of paragraphs the term appears in, along with the number paragraphs over 30 words, was a creative means of identifying companies where the audit committee plays a more expansive role.  This is a paper the contributes to the literature and one that I anticipate citing in my own future research.

 

Two minor points are that the companies selected (US pharmaceutical and energy companies) are highly regulated. It is unclear if the findings would be similar for companies in less regulated industries. Also, I recommend that the term “bankruptcy” as it is used in many parts of the paper be changed to insolvency.  Bankruptcy is a legal state and process whereas insolvency is a financial state. While most readers will not notice this distinction, insolvency scholars will, and this minor change will strengthen the paper.

 

Author Response

Dear Reviewer 2,

Please see the changes listed in the attached file. The changes are in blue in the manuscript.

Author

Author Response File: Author Response.docx

Round 2

Reviewer 1 Report

Comments and Suggestions for Authors

The authors addressed my comments and I recommend acceptance.