Dual–class ownership structure and audit fees

Abstract

A dual-class share structure creates a separation between cash flow rights and voting rights. Dual-class firms impact audit fees through their effect on supply/demand for auditing. This article examines the association between audit fees and dual-class share structure for U.S. public firms. We find that a dual-class share structure is associated with lower audit fees compared to single-class firms. Further, within dual-class firms, we find that the divergence between cash flow rights and voting rights is negatively associated with audit fees. The results are consistent with the managerial incentive-alignment effect and/or the insulation effect of a dual-class share structure on the supply/demand for audit services. This study highlights that the ownership structure of a firm constitutes an important role in audit pricing.

Ownership structure and audit fees: Evidence from Sub-Saharan Africa

“…In this situation, management of firms engages external auditors only to comply with regulations that require financial statements to be audited rather than to enhance quality of financial information. This behavior is related to information effect view, which suggests that sometimes insiders have no incentive to disclose information to outsiders (Lobanova et al, 2020). This implies that management of firms controlled by the government are more likely to lack motivation of providing more information and instead prefer to operate in high confidentiality (Lobanova et al, 2020) to conceal their private control benefits.…”

“…This behavior is related to information effect view, which suggests that sometimes insiders have no incentive to disclose information to outsiders (Lobanova et al, 2020). This implies that management of firms controlled by the government are more likely to lack motivation of providing more information and instead prefer to operate in high confidentiality (Lobanova et al, 2020) to conceal their private control benefits. Accordingly, extant literature indicates that government ownership is related to poor financial reporting (Al-Janadi et al, 2016).…”

“…This means that when managerial ownership is high, shareholders reduce use of monitoring mechanisms such as high quality audit services to control agency problems (Nikkinen & Sahlström, 2004). This is because high managerial ownership reduces managers' opportunistic behavior and therefore the possibility to manipulate financial information (Lobanova et al, 2020). This minimizes risk of financial misstatements which reduces audit risk.…”

“…This minimizes risk of financial misstatements which reduces audit risk. As a result, this decreases the need for detailed substantive audit procedure which reduces audit fees (Lobanova et al, 2020). In this regard, it is argued that high managerial ownership is associated with low audit fees (Lobanova et al, 2020).…”

“…Accordingly, this study addresses the concern raised by Liang et al (2020) by examining the influence of ownership structure on audit fees. Furthermore, most studies examining factors affecting audit fees are based in the developed countries (Lobanova et al, 2020;Shan et al, 2019;Widmann et al, 2020) that have relatively advanced good governance practices and institutional environments. However, Waweru, (2020) argues that because of prevailing differences in institutional environments between developed and developing countries, findings of studies in the developed countries might not capture the situation in developing countries.…”