The Role of Internal Control and Firm-Specific Characteristics on Firm Value: Evidence from Indian Financial Services Sector

This research determines the role of firm-specific characteristics such as firm size, firm age, liquidity, firm complexity, board independence, institutional ownership, non-performing assets, annual volatility of stock returns, leverage and internal control represented by Enterprise Risk Management (ERM) and Big4 auditor on the firm value measured using Tobin’s Q, Return On Equity (ROE) and Return On Assets (ROA). This proposition is addressed with the sound statistical investigation of 67 companies listed in the NSE financial services sector by utilizing annual panel data for 11 years from 2007-17. The important findings of the study are that the purchasers consider firm size, firm age, liquidity, the volatility of stock returns, and non-performing assets. ROA shows that the management has to focus on firm size, firm age, and volatility of stock returns. ROE informs that the investors will look into firm size, firm age, institutional ownership, non-performing assets, leverage, firm complexity, and volatility of stock returns.


Effect of Audit Committee and Big4 auditor on Firm Value
Without an audit committee (AC), it is complicated for the success of any organization in the current hostile environment (Lloyd & Fanning, 2007). Independent members in AC were observed to be more accountable and transparent as they are free from management intervention. A large number of members in AC might be ineffective when compared to smaller committees (García, Barbadillo & Parez, 2012). AC is crucial to overseeing the risk management systems, and they play a vital role in risk management (Turley & Zaman, 2004), and they can influence the board for the successful implementation of risk management (Paape & Speklé, 2012). The AC must elevate corporate governance standards to secure public interest (Vasile & Croitoru, 2013). External auditors report their opinions on the internal control quality of a firm. More specifically, they examine and express their views on annual accounts, consolidated financial statements, as well as the board of directors and administration of CEO. The panel data regression results of the study conducted by Chan and Li (2000) in the fortune 200 companies showed that experts and independence of the audit committee increased Q whereas research led by Yermack (1996) revealed a negative connection between AC size and Q of an organization. The study was conducted on 452 large scale US industrial companies from 1984-91. On the other hand, the size of the audit committee revealed a positive relationship with firm value in the study conducted by Szczepankowski (2012). The results of audit committee activity in 69 Polish public stock companies during 2009-10 were presented in the study. The Big4 (Deloitte, PwC, Ernst & Young and KPMG) are classified as excellent audit quality in most of the previous studies. DeAngelo (1981) identified Big4 auditors to have better monitoring power that facilitates greater credibility of the information. This gives positive signals to stakeholders about the goodwill of the company and greater market response from the users of financial statements. Big4 auditors are considered to identify and report any misrepresentation of financial statements diligently (Gounopoulos & Pham, 2017). Beasley et al. (2005) and Ghosh (2013) revealed that the independence of the board would bring better risk governance and thus enhance the scope of ERM implementation. Florio and Leoni (2017) found that board independence negatively impacts ROA but has a positive impact on Q. The more the number of subsidiaries, the more is the firm complexity. McShane, Nair and Rustambekov (2010) identified a positive impact of firm complexity on firm value. Gordon, Loeb and Tseng (2009) found that firm complexity can influence the relationship between ERM and firm value. Capasso, Gallucci and Rossi (2015) found that firm value is positively related to firm age in the Italian wine industry, which contradicted the findings of Adetunji and Owolabi (2016) and Rajesh Kumar and Sujit (2018) found out that firm size is an essential determinant of firm value. Most prior studies find that size is negatively associated with the firm value (Lang & Stulz, 1994;Sekerci, 2016;Sayilir & Farhan, 2017) while studies conducted by (Jin & Jorion, 2006;Hoyt & Liebenberg, 2011;Ballantyne, 2013;Mohamad, 2018) found a positive relationship between firm size and firm value. Florio and Leoni (2017) and Adetunji and Owolabi (2016) identified that firm size is negatively related to Q and has a positive relation to ROA. Institutional investors act as a monitoring agent for a company. The presence of large outside ownership will pave way for the implementation of ERM as they will pressurise the management to publish all the information (Liebenberg & Hoyt, 2003). Studies conducted by Marcia, Marcus, Saunders and Tehranian (2007), and Chaganti and Damanpour (1991) identified that institutional ownership has a positive impact on firm value. Organizations with higher financial leverage instigate greater deficit risk and thus more significant financial distress. Studies conducted by Liebenberg (2011), McShane, Nair andRustambekov (2010), Mohamad (2018) and Adetunji and Owolabi (2016) revealed that leverage negatively impacts firm value while Winarto (2015) found a positive influence to firm value. Ballantyne (2013) found that leverage didn't impact firm value. Jin andJorion (2006), andSekerci (2016) find that leverage is positively related to firm value. An organization that has a higher volume of cash produced from its internal activity is probably going to have more prominent slack accessible which it can use for ERM implementation. Along these lines, Ghosh (2013) supported that higher liquidity can encourage a firm to embrace ERM Winarto (2015) found liquidity posits a negative impact on firm value while Mohamad (2018) proved a positive influence on firm value. An organization may flag more severe risks connected with its performance due to instability in stock returns. In this way, they might have higher motivating factors to put resources into ERM to minimize the risks which can upset the accomplishment of organizational objectives. Many studies have hypothesized the relationship between the volatility of stock returns and ERM implementation (Liebenberg & Hoyt, 2003). The volatility of stock returns is negatively related to firm value (McShane, Nair & Rustambekov, 2010).

Research Objectives
▪ To identify the companies which have adopted ERM and Big4 auditor in the Indian financial services sectors. ▪ To explore the changes in the firm value based on the adoption of ERM during the study period. ▪ To investigate the changes in firm value based on the Big4 auditors. ▪ To analyze the impact of the adoption of ERM, the Big4 Auditor and the firm-specific characteristics on firm value.

Hypotheses Development
The relationships explored in the existing literature were used to formulate the following research hypotheses ▪ H01 -There is no significant difference in Q between ERM and non-ERM observations. ▪ H02 -There is no significant difference in ROA between ERM and non-ERM observations. ▪ H03 -There is no significant difference in ROE between ERM and non-ERM observations. ▪ H04 -There is no significant difference in Q between Big4 and non-Big4 observations. ▪ H05 -There is no significant difference in ROA between Big4 and non-Big4 observations. ▪ H06 -There is no significant difference in ROE between Big4 and non-Big4 observations.  Anju and Uma (2017) is used to test the impact of firm value and its determinants. In this study, firm value is measured using Tobin's Q, ROA and ROE as in Adetunji and Owolabi (2016).

Conceptual
Model 1 Q it = α + β 1 ERM it + β 2 AC it + β 3 SIZE it + β 4 AGE it + β 5 LIQ it + β 6 BOD it + β 7 INSOWN it + Β 8 NPA it + β 9 LEV it + β 10 FC it + β 11 VOL it + ε it Model 2 ROA it = α + β 1 ERM it + β 2 AC it + β 3 SIZE it + β 4 AGE it + β 5 LIQ it + β 6 BOD it + β 7 INSOWN it + Β 8 NPA it + β 9 LEV it + β 10 FC it + β 11 VOL it + ε it    There is an increase in the existence of ERM during the study period. Sixty-one banks were having ERM for the past 11 years, i.e., 2007-17. The Reserve Bank of India had released a notification in 2007 on compliance function in banks which emphasized on enterprise-wide risk management framework. In 2017, 66 banks had ERM. On the other hand, though there is an increasing trend in the presence of Big4 audit firms in the audit committee, only eight companies had a Big4 auditor in 2017.

Findings for Objective 2
A one-way ANOVA was performed to decide if the firm value measured by Q, ROA and ROE differed between ERM (N = 689) and non-ERM (N = 48) companies. Of all the three measures, ROA has a higher value than all other measures of firm value. ROA indicates how profitable are the firm's assets in generating income. ERM helps to safeguard the assets and create firm value to their owners. ANOVA table suggests that there is a significant difference in the ROA among the companies that have integrated ERM and not integrated ERM. Non-ERM observations have a higher mean than ERM observations. It means that the companies that do not have ERM in place can generate better ROA. Implementation of ERM will reduce the net income as it involves a large amount of investments. ROE is a measure that indicates how well a company uses its investments in generating earnings. Tobin's Q is the measure of market capitalization on the replacement value of assets. The firm value measured by Q and ROE is different between the ERM and non-ERM observations. It implies that the investors and purchasers of the company consider the presence of ERM before making an investment or calculating the market value of the firm.  In Table 6 firm value is not different between the Big4 and non-Big4 observations. Only 9% of the firms (73 firmyear observations) showed the presence of Big4 auditor in the audit committee. It implies that investors and purchasers of the company are not dependent on whether the company has incorporated Big4 in the audit committee for making investment decisions. So, in the long term, when more firms include Big4 audit firms in their audit committee, it may affect firm value. 8.5 Findings for Objective 4 8.5.1 Correlation Analysis Pearson Product Moment Correlation has been utilized to gauge the linear connection between the variables.      Table 9 shows the VIF statistics of the independent variables. The VIF mean is 1.67, which indicates that there is no multicollinearity.    Table 11 shows the results of autocorrelation in panel data. The Wooldridge test for autocorrelation rejects the null hypothesis that there is no first-order autocorrelation in model 1 and model 3. There is the first-order autocorrelation in model 2. Hence the panel data regression model uses cluster-robust standard errors to control autocorrelation in model 1 and model 3. Table 12 shows the results of panel data regression estimated using OLS, FEM, and REM models using Q, ROA, and ROE as the dependent variable. The Hausman test shows a significant p-value that indicates FEM is appropriate for Model 1, 2, and 3. Panel Data Fixed Effect Model 1 is significant and has explanatory power with a good fit as F-statistic = 23.45 and p-value = 0.000, R-squared = 0.73 indicating that the dependent variables predict 73% of the variances in Q.

Regression Analysis
In table 13, the results of the FEM show that there is a significant relationship between the firm size, firm age, liquidity, non-performing assets, volatility and the firm value measured using Q. The results show that the NPA has the highest impact as it decreased the firm value by 1.78. If NPA rises, they cannot recover their interest income as borrowers do not pay interests and installments. This creates a negative impression in the minds of the purchasers and reduces the market value of the company. The size of the firm measured by total assets has a negative impact on Q by 0.34. This is consistent with the findings of Florio and Leoni (2017) and Adetunji and Owolabi (2016). If the total assets are more in a financial services company, it signals the purchasers that the company does not have investment opportunities, so that it is assessed as unfavorable. The volatility of stock returns increases Q by 0.15 from 2007-17. In this study, there are 372 firm-year observations in the financial services sector with high volatility in daily stock returns that indicate the demand for the firms' share. This creates a positive impression in the minds of the purchasers and influences the market estimation of the company. As the financial service sector firm grows old, it can create a better image in the minds of purchasers and thus improve market value. Firm age has a positive approach to Q throughout the study. It increases Q by 0.12. Financial firms' liquidity is affected if NPA increases. The results show that liquidity decreases the firm value by 0.09 during the study period. So, to improve liquidity, firms should make regular efforts to reduce bad debt and mobilize additional resources. Panel Data Fixed Effect Model 2 is significant and has explanatory power with a good fit as F-statistic = 8.88 and p-value = 0.000, R-squared = 0.51 indicating that the dependent variables predict 51% of the variances in ROA.
In table 14, the results of the FEM show a significant relationship between the firm size, firm age, volatility and ROA. As the assets of the firm increases, the management can generate greater profits. That is why firm size has a positive impact on ROA. It increases the firm value by 0.97 during the study period. There are 372 firm-year observations with the high volatility of stock returns indicating that any change in the value of the share will negatively affect the ROA by 0.66. Firm age has decreased ROA by 0.42. In this study, there are 470 firm-year observations with less than 45 years of mean industry age. Only when the company grows older, it will be able to understand the business environment better and manage the assets more efficiently. On the contrary, the existence of ERM, the presence of Big4 auditor, board independence, firm complexity, institutional ownership and leverage have an insignificant impact on ROA. It means that the total assets and net income of the company are not affected by the presence of ERM, Big4 audit firms in the audit committee, number of independent directors on the board, number of subsidiaries, the percentage of institutional investors and the percentage of debt-equity for the period 2007 to 2017. Panel Data Fixed Effect Model 3 is significant and has explanatory power with a good fit as F-statistic = 8.3944 and p-value = 0.000, R-squared = 0.49 indicating that the dependent variables predict 49% of the variances in ROE.
In table 15, the results of the FEM show that there is a significant relationship between firm size, firm age, institutional ownership, non-performing assets, leverage, firm complexity, volatility, and firm performance measured using ROE. On the contrary, the existence of ERM, the presence of Big4 auditor, board independence, and liquidity has an insignificant impact on firm value. For firm size, the beta values show an increase of 4.16 in ROE during the study period. Investors look forward to investing in firms with a large asset base, as it will generate more returns for their investment. That is why firm size has the highest impact on ROE. There are 372 firm-year observations that high volatility in daily stock returns. It has decreased the ROE of 3.11. Investors prefer low-volatility stocks to minimize risk in their portfolios. When the company grows old, it can create a better image in the minds of the investor. But here, there are 470 firm-year observations with less than 45 years of mean industry age. Hence it decreases the ROE by 2.05. There are 407 firm-year observations with low leverage, indicating that there is more equity than borrowings, which signals the investors that the company can generate more income from its investments in the long run. Hence leverage increases ROE by 0.48 during the study period. The number of subsidiaries indicates the company's vision for growth and expansion to the investors. So, these have a positive effect on ROE. During the study period, the percentage of institutional investors and the number of subsidiaries increase the ROE by 0.19 and 0.18 respectively. NPA creates a negative effect on the minds of investors. Hence it decreases ROE. The results of hypotheses testing are shown in Table 16. Thus, in the financial services sector, it is evident there are differences in firm value for ERM and non-ERM companies. But on the other side, there is no difference in firm value for Big4 and non-Big4 companies. The firm value measured by Q showed that the purchasers consider firm size, firm age, liquidity, the volatility of stock returns, and non-performing assets. ROA indicated that the management has to focus on firm size, firm age, and volatility of stock returns. ROE pointed out that the investors will look into firm size, firm age, institutional ownership, non-performing assets, leverage, firm complexity. and volatility of stock returns.

Discussion and Conclusions
This research determined the role of firm-specific characteristics and internal control represented by ERM and big4 auditor on the firm value measured using a three-dimensional approach -from the purchaser, management and investor perspective.

Purchaser's Perspective
For ERM, the study reveals that there is an increase in the Beta coefficient, which means the adoption of ERM, increased the Q value by 0.23. It implies that the existence of ERM will improve the confidence of purchasers in shares of the company and thus boost the market value of the company. The volatility of stock returns increases Q by 0.15. In this study, there are 372 firm-year observations in the financial services sector with high volatility in daily stock return, which indicates the demand for the firms' share. This creates a positive impression in the minds of the purchasers and thus affects the market value of the company. The findings are consistent with that of Fang, Noe and Tice (2009). As the financial service sector firm grows old, it can create better confidence in the minds of purchasers and thus improve market value. Firm age has a positive approach to Q throughout the study. It increases Q by 0.12. Leverage has a positive impact on the minds of the purchasers as it helps to expand the firm's asset and generate returns on risk capital. It increases Q by 0.01. Similarly, as with any other organization, banks with high leverage ratio is viewed as more secure. The bank needs to utilize its cash-flow to provide loans or sell its risky assets or make investments. This will create less impact if, in future, the creditors fail to repay their loans or the economy faces depression. The presence of Big4 audit firms in the audit committee seems to have a negative impact on Q. The huge resource commitment reduces the firm value by 0.07. It implies that the purchasers consider other factors apart from the audit quality by the Big4 auditors. Financial firms' liquidity is affected if NPA increases. The results show that liquidity decreases the firm value by 0.09, which is similar to the findings of Winarto (2015). So, to improve liquidity, firms should make regular efforts to reduce bad debt and mobilize additional resources. The size of the firm measured by total assets has a negative impact on Q by 0.34. This is consistent with the findings of Florio and Leoni (2017) and Adetunji and Owolabi (2016). If the total assets are more in a financial services company, it signals the purchasers that the company does not have investment opportunities, so that it is assessed as unfavorable. The results show that the NPA decreased the firm value by 1.78. If NPA rises, they cannot recover their interest income as borrowers do not pay interests and installments. This creates a negative impression in the minds of the purchasers and reduces the market value of the company. Results show that the purchaser does not consider the number of independent directors on the board, the number of subsidiaries and the percentage of institutional investors in the financial services sector. So, it does not help to increase the market value of a company measured by Q.

Management's Perspective
As the assets of the firm increases, the management can generate greater profits. That is why firm size has a positive impact on ROA. It increases the firm value by 0.97 during the study period. This result is consistent with that of Florio and Leoni (2017) and Adetunji and Owolani (2016). The regression coefficients indicate that the existence of ERM and the presence of Big4 auditors have a positive impact on ROA during the study period. When ERM is in place, the management can anticipate risks, prevent losses and increase profits. Also, the Big4 auditor ensures audit quality. Though the implementation of ERM and Big4 auditor involves huge resource commitment, it is observed that it will help the management to increase ROA in the long run by 0.36 and 0.39, respectively. On average, institutional investors hold 0.27 of the shares. The institutional investors have more resources than the individual investor. During the study period, institutional investors help to increase ROA by 0.04. The presence of prudent and effective institutional investors will motivate the management to perform efficiently, which will help to increase the ROA. NPA indicates the inefficiency of management to prevent bad debts. It doesn't seem to affect ROA. 243 firm-year observations have subsidiaries more than the industry mean. It has increased ROA. It shows the management's efficiency to expand and grow. The number of independent directors on the board helps to improve the efficiency of management through better monitoring and governance. There are 330 firm-year observations, which is highly leveraged, indicating that there are more borrowings than equity, which will affect the net income and assets of the firm. Hence leverage decreases ROA by 0.08. Negative operating cash flow indicates the inefficiency of the management in meeting its operating expenses by generating profits from total assets. In this study, liquidity denotes the net cash flow from operating activities divided by the total assets. 278 firm-year observations are denoting negative liquidity. For liquidity, the study reveals that there is a decrease in ROA by 0.19. Firm age has decreased ROA by 0.42. In this study, there are 470 firmyear observations with less than 45 years of mean industry age. Only when the company grows older, it will be able to understand the business environment better and manage the assets more efficiently. This supports the findings of Capasso et al. (2015), Dogan (2013) and Coad, Segarra and Teruel (2012). There are 372 firm-year observations with the high volatility of stock returns indicating that any change in the value of the share will negatively affect the ROA by 0.66.

Investor's Perspective
For firm size, the beta value shows an increase of 4.16 in ROE. Investors look forward to investing in firms with a large asset base, as it will generate more returns for their investment. That is why firm size has the highest impact on ROE. Though ERM and Big4 auditors do not ensure guaranteed return on equity, it is evident from the results that their presence in the organization gains the trust and confidence of investors. The study period shows it will increase ROE by 0.91 and 1.79, respectively. There are 407 firm-year observations with low leverage, indicating that there is more equity than borrowings, which signals the investors that the company can generate more income from its investments in the long run. Hence leverage increases ROE by 0.48 during the study period. The investors look into the number of independent directors on the board and the percentage of institutional investors before investing in the company. It implies the safety of their investments, as there are good governance and monitoring in the firm. The number of subsidiaries indicates the company's vision for growth and expansion to the investors. So, these have a positive effect on ROE. During the study period, the percentage of institutional investors improved the ROE by 0.19. This supported the findings of Masry (2016). Also, the number of institutional investors and the percentage of independent directors on the management board increases the ROE by 0.18 and 0.03, respectively. The capacity to pay estimated expenses like providing loans or paying debts using liquid assets decides a bank's liquidity. Here liquidity decreases ROE by 0.005 during the study period. Investors will be interested when a bank maintains a liquidity level that allows it to pay unexpected expenses without liquidating other assets. So, a negative operating cash flow indicates the investors that the company doesn't have sufficient liquid assets to meet its operating expenses. NPA creates a negative effect on the minds of investors. Adebisi and Matthew (2015), Sharifi and Akhter (2016) and Nyarko-Bassi (2018) also agreed on the negative effect of NPA on ROE. As the company grows old, it can create a better image in the minds of the investor. But here, there are 470 firm-year observations with less than 45 years of mean industry age. Hence it decreases the ROE by 2.05. This finding is consistent with Susanti and Restiana (2018) and Ilaboya and Ohiokha (2016). 372 firmyear observations have high volatility in daily stock returns. It has decreased the ROE of 3.11. When the value of the share fluctuates erratically with a rapid increase and immediate falls, it is a high stock. Low volatility stocks help to minimize risks in investor's portfolios as it is steady thus investors prefer it.

Implications of the Study
The findings of this study are more reliable, accurate, and represent all firms in the financial services sector. The results from the analysis respond to the study's research questions and are of particular interest to investors, researchers and practicing managers in the above sector.
▪ This study helps to understand that the amendments in the Companies Act led to an increase in Q and a decrease in ROA and ROE. Stringent internal control through ERM and Big4 auditor in the Audit committee builds confidence in the purchasers. But the huge resource commitment in implementing ERM and the adoption of Big4 auditors reduce the net income, which affects the returns for management and investors. ▪ From this study, it is clear that there is an increase in the adoption of ERM from 61 to 66 firms and from 4 to 8 in the adoption of Big4 auditors. ▪ The outcome of this study explained that are differences in the firm value among companies that have integrated ERM and not integrated ERM. The companies that do not have ERM in place have higher ROA. Implementation of ERM will reduce the net income as it involves a large number of investments. The investors and purchasers of the company do not consider the presence of ERM before making an investment or calculating the market value of the firm. ▪ The investors and purchasers of the company are not dependent on whether the company has incorporated Big4 in the audit committee for making investment decisions. So, in the long term, when more firms include Big4 audit firms in their audit committee, it may affect firm value. ▪ The study showed that the age of the firm and the number of subsidiaries creates confidence in the minds of the purchasers and thus influence Q. ▪ The outcome of this study indicated that the volatility of stock returns and the firm age influenced ROA. ▪ The results of the study indicated that the firm size, volatility and firm age affected ROE. ▪ Data from this study shows that NPA has the highest impact on Q, and firm size has a major effect on ROA and ROE.

Recommendations
This study has contributed to the existing literature by identifying the factors that will impact firm value from three dimensions -purchaser, management and investor in the financial services sector. ▪ NPA had the highest impact on firm value (Q). To build the confidence of a prospective purchaser, the bankers have to focus on stringent credit policies and debt collection policy to reduce the bad debts. The firm value of the banks will increase if there are fewer bad debts written off from the profits of the banks. ▪ The companies should invest in ERM even it involves large investment as it helps to increment firm value (Q, ROA and ROE). ▪ The purchaser, management and investor are interested in a firm with a huge asset base. Hence, every firm should try to increase its size as it helps to improve firm value.