IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v28y2007i3p257-285.html
   My bibliography  Save this article

The empirical relationship between ownership characteristics and audit fees

Author

Listed:
  • Santanu Mitra
  • Mahmud Hossain
  • Donald Deis

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

Suggested Citation

  • Santanu Mitra & Mahmud Hossain & Donald Deis, 2007. "The empirical relationship between ownership characteristics and audit fees," Review of Quantitative Finance and Accounting, Springer, vol. 28(3), pages 257-285, April.
    • Handle: RePEc:kap:rqfnac:v:28:y:2007:i:3:p:257-285
    DOI: 10.1007/s11156-006-0014-7
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11156-006-0014-7
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-006-0014-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Timothy B. Bell & Wayne R. Landsman & Douglas A. Shackelford, 2001. "Auditors' Perceived Business Risk and Audit Fees: Analysis and Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 35-43, June.
    2. Aggarwal, Raj & Rao, Ramesh P, 1990. "Institutional Ownership and Distribution of Equity Returns," The Financial Review, Eastern Finance Association, vol. 25(2), pages 211-229, May.
    3. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    4. Simunic, Da, 1980. "The Pricing Of Audit Services - Theory And Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 161-190.
    5. Charles Kahn & Andrew Winton, 1998. "Ownership Structure, Speculation, and Shareholder Intervention," Journal of Finance, American Finance Association, vol. 53(1), pages 99-129, February.
    6. Eng, L. L. & Mak, Y. T., 2003. "Corporate governance and voluntary disclosure," Journal of Accounting and Public Policy, Elsevier, vol. 22(4), pages 325-345.
    7. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    8. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    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. Kaplan, Steven N. & Minton, Bernadette A., 1994. "Appointments of outsiders to Japanese boards: Determinants and implications for managers," Journal of Financial Economics, Elsevier, vol. 36(2), pages 225-258, October.
    11. Gillan, Stuart L. & Starks, Laura T., 2000. "Corporate governance proposals and shareholder activism: the role of institutional investors," Journal of Financial Economics, Elsevier, vol. 57(2), pages 275-305, August.
    12. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    13. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    14. Orie Barron & Jamie Pratt & James D. Stice, 2001. "Misstatement Direction, Litigation Risk, and Planned Audit Investment," Journal of Accounting Research, Wiley Blackwell, vol. 39(3), pages 449-462, December.
    15. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    16. Jeffrey Cohen & Ganesh Krishnamoorthy & Arnold M. Wright, 2002. "Corporate Governance and the Audit Process," Contemporary Accounting Research, John Wiley & Sons, vol. 19(4), pages 573-594, December.
    17. Warfield, Terry D. & Wild, John J. & Wild, Kenneth L., 1995. "Managerial ownership, accounting choices, and informativeness of earnings," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 61-91, July.
    18. Bange, Mary M. & De Bondt, Werner F. M., 1998. "R&D budgets and corporate earnings targets," Journal of Corporate Finance, Elsevier, vol. 4(2), pages 153-184, June.
    19. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    20. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
    21. 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.
    22. Steven Balsam & Eli Bartov & Carol Marquardt, 2002. "Accruals Management, Investor Sophistication, and Equity Valuation: Evidence from 10–Q Filings," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 987-1012, September.
    23. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    24. Steven Huddart, 1993. "The Effect of a Large Shareholder on Corporate Value," Management Science, INFORMS, vol. 39(11), pages 1407-1421, November.
    25. Duggal, Rakesh & Millar, James A., 1999. "Institutional ownership and firm performance: The case of bidder returns," Journal of Corporate Finance, Elsevier, vol. 5(2), pages 103-117, June.
    26. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    27. Simunic, Da, 1984. "Auditing, Consulting, And Auditor Independence," Journal of Accounting Research, Wiley Blackwell, vol. 22(2), pages 679-702.
    28. Okeefe, Tb & Simunic, Da & Stein, Mt, 1994. "The Production Of Audit Services - Evidence From A Major Public Accounting Firm," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 241-261.
    29. John, Kose & Senbet, Lemma W., 1998. "Corporate governance and board effectiveness1," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 371-403, May.
    30. James Jiambalvo & Shivaram Rajgopal & Mohan Venkatachalam, 2002. "Institutional Ownership and the Extent to which Stock Prices Reflect Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 117-145, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Santanu Mitra & Mahmud Hossain & Barry R. Marks, 2012. "Corporate ownership characteristics and timeliness of remediation of internal control weaknesses," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(9), pages 846-877, October.
    2. Amitava Roy, 2014. "Corporate Governance and Firm Performance: An Exploratory Analysis of Indian Listed Companies," Jindal Journal of Business Research, , vol. 3(1-2), pages 93-120, June.
    3. Goergen, Marc & Manjon, Miguel C. & Renneboog, Luc, 2008. "Recent developments in German corporate governance," International Review of Law and Economics, Elsevier, vol. 28(3), pages 175-193, September.
    4. Shan, Yuan George & Troshani, Indrit & Tarca, Ann, 2019. "Managerial ownership, audit firm size, and audit fees: Australian evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 35(C), pages 18-36.
    5. Stuart L. Gillan & Laura T. Starks, 2002. "Institutional Investors, Corporate Ownership, and Corporate Governance: Global Perspectives," WIDER Working Paper Series DP2002-09, World Institute for Development Economic Research (UNU-WIDER).
    6. Ding, Rong & Hou, Wenxuan & Kuo, Jing-Ming & Lee, Edward, 2013. "Fund ownership and stock price informativeness of Chinese listed firms," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 166-185.
    7. Andreou, Panayiotis C. & Louca, Christodoulos & Panayides, Photis M., 2014. "Corporate governance, financial management decisions and firm performance: Evidence from the maritime industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 63(C), pages 59-78.
    8. Rizzotti, Davide & Greco, Angela M., 2013. "Determinants of Board of Statutory Auditor and Internal Control Committee Diligence: A Comparison Between Audit Committee and the Corresponding Italian Committees," The International Journal of Accounting, Elsevier, vol. 48(1), pages 84-110.
    9. Fleming, Grant & Heaney, Richard & McCosker, Rochelle, 2005. "Agency costs and ownership structure in Australia," Pacific-Basin Finance Journal, Elsevier, vol. 13(1), pages 29-52, January.
    10. Jesus Sáenz González & Emma García-Meca, 2014. "Does Corporate Governance Influence Earnings Management in Latin American Markets?," Journal of Business Ethics, Springer, vol. 121(3), pages 419-440, May.
    11. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    12. Faccio, Mara & Lasfer, M. Ameziane, 2000. "Do occupational pension funds monitor companies in which they hold large stakes?," Journal of Corporate Finance, Elsevier, vol. 6(1), pages 71-110, March.
    13. Attiya Y. Javid & Robina Iqbal, 2010. "Corporate Governance in Pakistan : Corporate Valuation, Ownership and Financing," Governance Working Papers 22830, East Asian Bureau of Economic Research.
    14. Chaiyasit Anuchitworawong, 2010. "The Value of Principles-Based Governance Practices and the Attenuation of Information Asymmetry," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(2), pages 171-207, June.
    15. Isabel Gutierrez & Jordi Surroca, 2014. "Revisiting corporate governance through the lens of the Spanish evidence," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(4), pages 989-1017, November.
    16. Samah Rebai Azouz, 2013. "Gouvernement D'Entreprise Et Choix Du Mode De Comptabilisation Des Investissements En R&D : Cas Des Entreprises Françaises Cotées," Post-Print hal-00996788, HAL.
    17. 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.
    18. Paul André & Walid Ben-Amar & Samir Saadi, 2014. "Family firms and high technology Mergers & Acquisitions," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(1), pages 129-158, February.
    19. Park, Yun W. & Selvili, Zekiye & Song, Moon H., 2008. "Large outside blockholders as monitors: Evidence from partial acquisitions," International Review of Economics & Finance, Elsevier, vol. 17(4), pages 529-545, October.
    20. Guang‐Zheng Chen & Edmund C. Keung, 2018. "Corporate diversification, institutional investors and internal control quality," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 751-786, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:28:y:2007:i:3:p:257-285. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.