Foreign Ownership and Audit Fees: Does the Legal Origin of the Foreign Owner and the Firm Matter?

• In Event: Break and Research & Education Poster Forum

Abstract

This paper investigates whether foreign ownership affects audit fees by analyzing shareholdings of the biggest individual foreign owners in firms from ten European countries (Austria, Belgium, Denmark, Germany, Ireland, Italy, the Netherlands, Norway, Spain, and the United Kingdom) from 2005-2012. The results show that foreign ownership is positively associated with audit fees. This is consistent with the notion that foreign owners are at an information disadvantage and, therefore, face heightened agency problems, which increases their demand for reliable, third-party assured financial statements of their firm investments. The results also show that the positive association between foreign ownership and audit fees is moderated by the institutional context of the biggest individual foreign owner’s home country. In fact, the positive association between foreign ownership and audit fees is mainly driven by foreign owners from countries with strong shareholder protection (i.e., common-law vs. civil-law origin). We find, however, no clear evidence suggesting that the quality of the shareholder protection system of the country in which the firm investment is located also shapes the relationship between foreign ownership and audit fees.

Authors

• Jonas Schaeuble, ESCP Europe Business School Paris

• Karola Bastini, Technical University of Berlin