The empirical relationship between ownership characteristics and audit fees |
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Authors: | Santanu Mitra Mahmud Hossain Donald R Deis |
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Institution: | (1) Department of Accounting, School of Business Administration, Wayne State University, Detroit, MI 48202, USA;(2) Department of Accounting, Fogelman College of Business, University of Memphis, Memphis, TN, USA;(3) Ennis & Virginia Joslin Endowed Chair in Accounting, College of Business, Texas A&M University at Corpus Christi, 6300 Ocean Drive, Corpus Christi, TX 78412, USA |
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Abstract: | The present study examines the empirical relationship between ownership characteristics and audit fees. The basic premise
is that the level of ownership sophistication and the extent to which ownership is large and substantial impact the effectiveness
of stockholder monitoring on corporate affairs including the financial reporting process. Furthermore, high managerial ownership
firms may experience a decline in agency problems in financial reporting due to a decrease in managerial propensity to misreport
financial results. By employing a cross-sectional least squares regression analysis for a sample of 358 New York Stock Exchange-listed
firms audited by the Big Five auditors, we find evidence of a significantly positive relationship between diffused institutional
stock ownership (i.e., having less than 5% individual shareholding) and audit fees, and a significantly negative relationship
between institutional blockholder ownership (i.e., having 5% or more individual shareholding) and audit fees. Finally, we
document that managerial stock ownership is negatively associated with audit fees. We do not, however, find evidence of any
relationship between noninstitutional blockholder ownership (with at least 5% individual stock ownership) and audit fees.
The study's main results hold in various specification tests including when the effects of board-related and audit committee
variables are factored in the analysis. Based on the observed relationship between the ownership variables and audit fees,
we suggest that the ownership characteristics of a firm as a part of its governance mechanism constitute an important determinant
of audit fees.
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Keywords: | Diffused institutional stock ownership Institutional and noninstitutional blockholder ownership Managerial stock ownership Audit fees Agency problem Corporate Governance |
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