Predicting Auditors’ Opinions Using Financial Ratios and Non-Financial Metrics: Evidence from Iran

Purpose- The purpose of the paper is to investigate the extent to which a model based on financial and non-financial variables predicts auditors' decisions to issue qualified audit reports in the case of companies listed on the Tehran Stock Exchange (TSE). Design/methodology/approach- The authors utilized data from the financial statements of 96 Iranian firms as the sample over a period of five years (2012-2016). A total of 480 observations were analysed using a probit model through 11 primary financial ratios accompanying non-financial variables, including the type of audit firm, auditor turnover and corporate performance, which affect the issuance of audit reports. Findings- The results demonstrated high explanatory power of financial ratios and type of audit firm (the national audit organization vs. other local audit firms) in explaining qualifications through audit reports. The predictive accuracy of the estimated model is evaluated using a regression model for the probabilities of qualified and clean opinions. The model is reliable, with 72.9 percent accuracy in classifying the total sample correctly to explain changes in the auditor's opinion. Practical implications- The paper has practical implications and can assist auditors in identifying factors motivating audit report qualifications, mainly in emerging economies. Originality/value- The paper contributes to auditing research, since very little is known about the determinants of audit opinion in emerging markets including Iran; it also constitutes an addition to previous knowledge about audit opinion in the context of TSE. The paper is one of the rare studies predicting auditor opinions using both financial variables and non-financial metrics

Emotional economic man:Calculation and anxiety management in investment decision making

Dominant theorisations of investment decision making remain firmly wedded to the notion of economic rationality, either as a postulate of how financial actors actually behave or as a normative ideal to which financial actors should strive. However, such frameworks have been developed largely without engaging financial market participants themselves. Based on 51 in-depth interviews with fund managers in various global financial centres, this article highlights a number of features of investment decision making that mainstream finance and behavioural approaches both fail adequately to describe. Drawing on psychoanalytic theory, it is shown how the inherent uncertainty of the investment process engenders a state of endemic anxiety among fund managers. This anxiety is managed via a range of mental defences, both conscious and unconscious. The importance fund managers place on meeting and putting trust in company management to ‘perform’ for them can equally be viewed as a means of alleviating anxiety rather than having any direct economic purpose. This article, furthermore, brings to light the crucial role that calculative techniques play in dealing with anxiety. Rather than constituting a means of restoring rationality or correcting cognitive biases, calculation can actually reinforce ego defences while simultaneously perpetuating the myth of homo economicus. Fund managers can be characterised as ‘doing’ but ‘not doing’ and ‘knowing’ but ‘choosing not to know’ and have to manage not only their clients' funds, but their own personal anxiety as well

Mutual fund performance: Measurement and evidence

The paper provides a critical review of empirical findings on the performance of mutual funds, mainly for the US and UK. Ex-post, there are around 0-5% of top performing UK and US equity mutual funds with truly positive-alpha performance (after fees) and around 20% of funds that have truly poor alpha performance, with about 75% of active funds which are effectively zero-alpha funds. Key drivers of relative performance are, load fees, expenses and turnover. There is little evidence of successful market timing. Evidence suggests past winner funds persist, when rebalancing is frequent (i.e., less than one year) and when using sophisticated sorting rules (e.g., Bayesian approaches) - but transactions costs (load and advisory fees) imply that economic gains to investors from winner funds may be marginal. The US evidence clearly supports the view that past loser funds remain losers. Broadly speaking results for bond mutual funds are similar to those for equity funds. Sensible advice for most investors would be to hold low cost index funds and avoid holding past 'active' loser funds. Only sophisticated investors should pursue an active ex-ante investment strategy of trying to pick winners - and then with much caution. © 2010 New York University Salomon Center and Wiley Periodicals, Inc

What Determines Fund Performance Persistence? International Evidence

We study performance persistence across a global sample of equity mutual funds from 27 countries. In contrast to the existing U.S.-based evidence, we find that net performance persistence is present in the majority of fund industries, suggesting that fund manager skill is commonplace rather than a rarity. Consistent with the intuition that more competition in the mutual fund industry makes remaining a winner fund less likely but keeping a loser fund at the bottom of the performance ranks more probable, we show that competitiveness explains the cross-sectional variation in performance persistence