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The empirical relationship between ownership characteristics and audit fees

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Author Info

  • Santanu Mitra

    ()

  • Mahmud Hossain

    ()

  • Donald Deis

    ()

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    Abstract

    The present study examines the empirical relationship between ownership characteristics and audit fees. The basic premise is that the level of ownership sophistication and the extent to which ownership is large and substantial impact the effectiveness of stockholder monitoring on corporate affairs including the financial reporting process. Furthermore, high managerial ownership firms may experience a decline in agency problems in financial reporting due to a decrease in managerial propensity to misreport financial results. By employing a cross-sectional least squares regression analysis for a sample of 358 New York Stock Exchange-listed firms audited by the Big Five auditors, we find evidence of a significantly positive relationship between diffused institutional stock ownership (i.e., having less than 5% individual shareholding) and audit fees, and a significantly negative relationship between institutional blockholder ownership (i.e., having 5% or more individual shareholding) and audit fees. Finally, we document that managerial stock ownership is negatively associated with audit fees. We do not, however, find evidence of any relationship between noninstitutional blockholder ownership (with at least 5% individual stock ownership) and audit fees. The study's main results hold in various specification tests including when the effects of board-related and audit committee variables are factored in the analysis. Based on the observed relationship between the ownership variables and audit fees, we suggest that the ownership characteristics of a firm as a part of its governance mechanism constitute an important determinant of audit fees. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11156-006-0014-7
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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 28 (2007)
    Issue (Month): 3 (April)
    Pages: 257-285

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    Handle: RePEc:kap:rqfnac:v:28:y:2007:i:3:p:257-285

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: Diffused institutional stock ownership; Institutional and noninstitutional blockholder ownership; Managerial stock ownership; Audit fees; Agency problem; Corporate Governance;

    References

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    1. Steven Huddart, 1993. "The Effect of a Large Shareholder on Corporate Value," Management Science, INFORMS, vol. 39(11), pages 1407-1421, November.
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    9. Chung, Richard & Firth, Michael & Kim, Jeong-Bon, 2002. "Institutional monitoring and opportunistic earnings management," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 29-48, January.
    10. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
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    Cited by:
    1. Mary Jane Lenard & Karin A. Petruska & Pervaiz Alam & Bing Yu, 2012. "Indicators of audit fees and fraud classification: impact of SOX," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(5), pages 500-525, July.
    2. Rustam, Sehrish & Rashid, Kashif & Zaman, Khalid, 2013. "The relationship between audit committees, compensation incentives and corporate audit fees in Pakistan," Economic Modelling, Elsevier, vol. 31(C), pages 697-716.
    3. Ismail Adelopo & Kumba Jallow & Peter Scott, 2012. "Multiple large ownership structure, audit committee activity and audit fees: Evidence from the UK," Journal of Applied Accounting Research, Emerald Group Publishing, vol. 13(2), pages 100-121.
    4. C. Piot & L. Kermiche, 2009. "A quoi servent les comités d'audit ? Un regard sur la recherche empirique," Post-Print halshs-00537952, HAL.
    5. Effiezal Aswadi Abdul Wahab & Mazlina Mat Zain & Kieran James, 2011. "Political connections, corporate governance and audit fees in Malaysia," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(5), pages 393-418, May.
    6. Oana Raluca Ivan, 2011. "Audit Fee Econometrical Models An Overview Of The Auditing Research Literature," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 20.
    7. Hope, Ole-Kristian & Langli, John Christian & Thomas, Wayne B., 2012. "Agency conflicts and auditing in private firms," Accounting, Organizations and Society, Elsevier, vol. 37(7), pages 500-517.
    8. Effiezal Aswadi Abdul Wahab & Mazlina Mat Zain & Kieran James & Hasnah Haron, 2009. "Institutional investors, political connection and audit quality in Malaysia," Accounting Research Journal, Emerald Group Publishing, vol. 22(2), pages 167-195, September.
    9. Azhaar Lajmi & Marjène Gana, 2011. "Structure de Propriété et Qualité de l'Audit Externe : Cas des Entreprises Belges Cotées," Post-Print hal-00650542, HAL.
    10. Lobna Loukil, 2010. "Conséquences De L'Adoption Des Normes Internationales «Ifrs» Sur Le Coût D'Audit Financier," Post-Print hal-00481517, HAL.

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