Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - The effect of governance on specialist auditor choice and audit fees in U.S. family firms
AU - Srinidhi, Bin
AU - He, Shaohua
AU - Firth, Michael
PY - 2014/11
Y1 - 2014/11
N2 - Family firms are characterized by less separation between ownership and control(Type 1 agency problem) but greater conflict of interest between controlling insiders and noncontrolling outside investors (Type 2 agency problem). Although strong board governance is known to decrease the Type 1 agency problem, its effectiveness in mitigating the adverse consequences of the Type 2 agency problem has not been well documented in the literature. We show that strongly governed family firms are more likely to choose specialist auditors and exhibit higher earnings quality than nonfamily firms. Weakly governed family firms demand lower audit effort and exhibit earnings quality that is no different from that of nonfamily firms.Within family firms, we show that strongly governed family firms choose higher quality audits in the form of a greater use of specialist auditors and higher audit efforts, and exhibit higher earnings quality than other family firms. These findings provide consistent evidence that strong board governance can effectively mitigate the adverse consequences of the Type 2 agency problem on financial reporting and transparency in family firms.
AB - Family firms are characterized by less separation between ownership and control(Type 1 agency problem) but greater conflict of interest between controlling insiders and noncontrolling outside investors (Type 2 agency problem). Although strong board governance is known to decrease the Type 1 agency problem, its effectiveness in mitigating the adverse consequences of the Type 2 agency problem has not been well documented in the literature. We show that strongly governed family firms are more likely to choose specialist auditors and exhibit higher earnings quality than nonfamily firms. Weakly governed family firms demand lower audit effort and exhibit earnings quality that is no different from that of nonfamily firms.Within family firms, we show that strongly governed family firms choose higher quality audits in the form of a greater use of specialist auditors and higher audit efforts, and exhibit higher earnings quality than other family firms. These findings provide consistent evidence that strong board governance can effectively mitigate the adverse consequences of the Type 2 agency problem on financial reporting and transparency in family firms.
KW - family firms
KW - board governance
KW - earnings quality
KW - auditor choice
KW - audit fees
U2 - 10.2308/accr-50840
DO - 10.2308/accr-50840
M3 - Journal article
VL - 89
SP - 2297
EP - 2329
JO - The Accounting Review
JF - The Accounting Review
SN - 0001-4826
IS - 6
ER -