The nuanced interplay between blockholders and audit fees: Empirical evidence from the UK alternative investment marketom

This study investigates the effect of blockholders' characteristics on audit fees by focusing on the Type II agency problem. Our study contributes to the debate on the interplay between blockholders' characteristics and audit fees on a sample of smaller and medium-sized firms listed on the United Kingdom (UK)'s Alternative Investment Market (AIM). Using voting rights as a proxy for blockholders' power, the findings of the study show that the presence and number of blockholders are positively associated with audit fees while voting dispersion is negatively associated with audit fees. Furthermore, the study provides evidence that the interplay between blockholders and external auditing is affected by coalition formation between blockholders and the largest controlling shareholder. Additional analysis reveals that if the first two and three largest blockholders are of the same type (such as all families or all corporations), then audit fees for those firms are higher than for firms where these blockholders are of a different type. In particular, the impact of blockholders on audit fees is more positive when firms are controlled by the holding of a family. Our findings have important implications for policymakers and audit practice regarding the interplay among external corporate governance mechanisms and institutional settings.