Managerial ownership, audit committees and non-audit services

Abstract

We extend prior research on corporate governance and non-audit services (NAS) by distinguishing between the management entrenchment region of management ownership and regions in which the interests of management and shareholders converge. Management entrenchment and convergence-of-interests regions were estimated for our sample of 5198 Australian firm-years. NAS is negatively (positively) associated with management ownership in the convergence-of-interests (entrenchment) regions. However, using a sub-sample based on firms that have audit committees, we find the association between NAS and management ownership is confined to the entrenchment region, while audit committee strength is negatively associated with NAS fees across all management ownership regions. JEL Classification: M42, M48

Managerial ownership, board independence and firm performance

“…First, it contributes by using the convergence-of-interests hypothesis vis-à-vis the entrenchment hypothesis (Fama and Jensen, 1983a; Jensen and Meckling, 1976; Morck et al , 1988) to examine the relationship between managerial ownership and firm performance. The findings confirm the conclusion of Shan et al (2017) in the Australian context, i.e. a convergence-of-interest effect increases firm performance when managerial ownership is in the range of 0-20 per cent and an entrenchment effect decreases firm performance when managerial ownership is in the range of 20-50 per cent.…”

“…The mean (median) of MOWN is 36 per cent (35 per cent) for the whole sample. The figures show the range of managerial ownership in the sample is 20-50 per cent, which is more likely to encounter an entrenchment effect (Shan et al , 2017). The mean (median) of BDINDEP is 68 per cent (79 per cent), which suggests, in average, the boards of Australian listed firms are controlled by independent directors.…”

“…, 1988). Shan el al. (2017) revealed that the entrenchment effect for Australian firm is around 20-50 per cent, and Table II indicates that the mean (median) of managerial ownership is 36 per cent (35 per cent), which fits in the entrenchment threshold of managerial ownership.…”

“…BDSIZE represents the number of directors on the board (Bhagat and Bolton, 2008; Bolton, 2014; Farooque et al , 2010; Palia, 2001). AC is coded 1 if the firm has an audit committee, 0 otherwise (Shan et al , 2017). BDMEET represents numbers of board meeting (Shan, 2013).…”

Management equity incentives and stock price crash risk: “Golden handcuffs” or “gold watch”

“…If there is no continuous linear relationship, the turning point cannot be determined. A new piecewise regression model designed by Shan et al [ 43 ] solves this problem well. The MEI range is divided into three subsets according to percentage: less than 10% (MEI_L), 10% to 30% (MEI_M), and greater than 30% (MEI_H).…”