Non-audit services and employee share ownership in the French civil law system: An agency theory perspective

This study adopts an agency theory perspective to examine the association between Employee Share Ownership (ESO) and the use of Non-Audit Services (NAS) in large French listed firms. Our goal is to provide a nuanced understanding of ESO as an incentive-alignment mechanism in contexts with concentrated ownership. The findings reveal that higher levels of ESO are positively associated with the use of NAS. Additional tests show that the component of NAS explained by ESO is associated with higher future profitability, while abnormally high levels of NAS are associated with decreased future firm performance. These results challenge conventional concerns over NAS impairing auditor independence. Instead, they suggest that NAS incurs a bonding cost that strengthens stakeholder alignment in the presence of ESO. This conclusion is supported by a test showing that a negative association between audit committee expertise and NAS is mitigated in the presence of higher levels of ESO. This study highlights the dual role of ESO in lowering monitoring costs and increasing bonding costs. It also offers practical implications, suggesting that policymakers should support ESO initiatives and corporate executives should implement ESO as a complementary corporate governance tool. The findings expand the understanding of ESO beyond traditional contexts and open avenues for future research on governance dynamics in civil law settings