Demand for Audit Quality in Small Private Firms: Evidence on Ownership Effects
33 Pages Posted: 9 Jan 2009 Last revised: 6 Apr 2009
Date Written: March 25, 2009
Abstract
This study investigates the interaction between audit quality and agency costs, when managerial ownership is used as a proxy for agency costs. The literature on audit quality suggests that firms with high agency costs are more likely to demand audit quality. Our database enables us to compare the demand for audit quality with two different measures; demand for Big 4 auditors and certified auditors with strict professional requirements. The results show that an increase in managerial ownership decreases the likelihood that the firm will engage a Big 4 auditor but it does not have an impact on the demand for certified auditors. Our findings also support previous studies that suggest a nonlinear connection between managerial ownership and demand for audit quality in terms of Big 4 audits. This suggests that audits by Big 4 audit firms are used in informationally opaque private firms to overcome agency costs. We also find that the probability of choosing a Big 4 auditor increases with an increase in firm size and the presence of foreign sales. An increase in leverage increases the likelihood that the firm will engage a Big 4 auditor only in the larger firms and in firms, in which management ownership is above 50%.
Keywords: Agency Costs, Audit Quality, Managerial Ownership
JEL Classification: M49, M47, D82, G30, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Role of Auditing in Small Private Family Firms: Is it About Quality or Credibility?
By Mervi Niskanen, Jukka Karjalainen, ...
-
Small Business Borrowing and the Owner-Manager Agency Costs: Evidence on Finnish Data
By Mervi Niskanen and Jyrki Niskanen
-
Audit Quality: The Role of Board Structure in Family Firms
By Mervi Niskanen, Jukka Karjalainen, ...