Insider Ownership and the Demand for Audit Quality: Evidence from Dual-Class Firm

• In Event: Auditing 1

Abstract

We examine the association of insider ownership and clients’ demand for audit quality in the unique setting of dual-class firms. The effect of insider ownership on the extent of agency problems, and hence the demand for audit quality, is ambiguous, because insider ownership exerts two effects: a positive incentive-alignment effect (from cash flow rights) and a negative entrenchment effect (from board control rights). Using a comprehensive hand-collected sample of U.S. dual-class firms, we find that insider cash flow rights are negatively associated with audit fees, auditor independence, and the propensity to hire a Big 4 or industry specialist auditor, while insider board control rights and the extent of disproportionate insider control display opposite associations. These results are consistent with general agency theory, which suggests a decreased (increased) demand for audit quality from incentive-alignment (entrenchment) effects of ownership.

Authors

• Arno Forst, Kent State University

• Barry R Hettler, Kent State University - Kent