Family firms, political connections and audit fees: evidence from Malaysian firms

Abstract

Purpose The purpose of this study is to examine the association between family firms and audit fees in an emerging economy setting. As family firms either face Type 1 or Type 2 agency problem, it seeks to gain a better understanding on family firms in an emerging economy such as Malaysia. Additionally, this study introduces political connections to investigate whether it can moderate the association between family firms and audit fees. Political connection is chosen as an important institutional feature because of its many and well-documented politically connected firms and pervasive political patronage system in Malaysia. Design/methodology/approach Based on a dataset of 750 firms or 7,848 firm-year observations from 2002 till 2015, panel regression analysis is used to investigate the research questions. As a robustness test, Heckman’s self-selection model is used to deal with the self-selection problem. Findings The results reveal that family firms are associated with higher audit fees, indicating that Type 2 dominates Type 1 agency problems in Malaysia. This positive relationship is stronger in family firms which are older and have higher family controlling shareholding. Further, the association is exacerbated if it is also connected to the ruling elite. Originality/value This study contributes to the literature by showing that institutional feature such as family firms and political connections can produce different firm outcomes between emerging and advanced economy, particularly in auditing. This study responds to calls for more research on auditing in family firms, particularly in emerging economy.

Risk management committee, independent commissioner, and audit fee: An update

“…We follow previous literature in using control variables (Gotti et al, 2012;Larasati et al, 2019;Singh et al, 2013;Sun et al, 2013;C. M;Tee, 2018).…”

“…We follow previous literature in using control variables (Gotti et al, 2012;Larasati et al, 2019;Singh et al, 2013;Sun et al, 2013;C. M;Tee, 2018). The control variables are the proportion of independent directors (DIBOD); the company's auditor choice (BIG4), political connection (PCON); number of employee (EMP); profitability (ROA); firm size (FSIZE); leverage (LEV); the proportion of receivable and inventory on total asset (RECINV).…”

CEO power and audit fees: Evidence from Malaysia

“…To compound this problem, auditors are reluctant, either due to lack of expertise or conflict of interest, to pursue this matter with their clients (Fan & Wong, ). Further, their independence may be undermined by inadequate disciplinary mechanisms (Ali et al, ) and lower litigation risks and legal protection for investors in Malaysia (Fan & Wong, ; Tee, ) . The recent Malaysia code of corporate governance (2017) introduced several provisions to alleviate agency problems related to family ownership.…”

“…For instance, 15 Malaysian families were worth 76% of Malaysian GDP in 2015 (The Economist, ). More importantly, Malaysian family ownership is primarily driven by relationship‐based business, including its relationship with auditors (Tee, ). Frequently, ownership is concentrated in one family and it is common for the CEO to be the chairman of the board (Tan, ).…”

“…For these reasons, Malaysia ranks second in the recent crony capitalism survey (The Economist, ), and was named as one of the world's top 10 kleptocratic states in 2017 (Asia Times, ). Second, capital markets in Malaysia have a large family ownership (Claessens, Djankov, Fan, & Lang, ; Fan & Wong, ; Tee, ). In this study's dataset, 43.3% (unreported) of Bursa Malaysia (Malaysian Stock Exchange) listed firms are in the hands of family ownership.…”