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CORPORATE GOVERNANCE & AUDITORS REFORM: AN EMPIRICAL REVIEW

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

A number of corporate governance codes across the globe have been enacted since the 1990s as a consequence of the corporate scandals, and also because of the substantial importance of corporate governance on corporate success and on overall economic health. In this vein, Jordan; over the last two decades has introduced a number of regulations to improve corporate governance and to enhance investors’ confidence, and ultimately to develop the financial market. The Jordan Securities Commission (JSC) has spent time and energy attempting to improve the roles of boards of directors and audit committees to ensure that investors obtain relevant and reliable information. The efforts of JSC in this vein are culminated in launching a Corporate Governance Code in 2008. This code put many responsibilities on the shoulders of boards of directors and audit committees as essential corporate governance pillars.

The credibility of financial statements is a significant responsibility attached to the board of directors and audit committees. So given that board of directors is responsible for controlling management behaviour and monitoring the overall financial system, and audit committee is directly responsible for overseeing financial reporting and auditing activities; it is expected from these two bodies to play a significant role in ensuring higher audit quality. However, adhering to the code recommendations does not necessarily ensure effectiveness i.e. companies may meet these recommendations as a tick box to meet the legal requirements or to mimic other companies (having more form over than substance). This is evidenced by many examples of companies that are collapsed despite their compliance with regulations. 

Corporate governance effectiveness affects stock market liquidity. Several recent studies as the pioneer work of Edmans (2009) has proved that market liquidity is closely sensitive to blockholders trading. In fact, the blockholders monitoring induce managers to undertake efficient real investment through their informed trading of the firm’s shares. These findings suggest that blockholders can exert governance even if they cannot intervene in a firm’s operation. Another seminal work of Edmans et al. (2013) empirically test the relation between the stock market liquidity and the monitoring of firms by the blockholder on the basis of the channel of

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