This article was originally published in 2018 in Auditing: A Journal of Practice & Theory 37 (3): 91-115.

Abstract:Although a large proportion of firms are family owned and most family firms are private, our understanding of private family firms is limited. Using confidential information on family relationships between board members, CEOs, and shareholders, this is the first study to provide large-scale evidence on the association between governance structure and firm performance in family-controlled private firms. Our sample is unique as it covers almost all private limited liability firms in Norway, spans 11 years, traces firm ownership to ultimate owners, and identifies family relationship using data on kinship, marriage, and adoption. The results show a U-shaped relationship between family ownership and firm performance. Higher ownership of the second largest owner, higher percentage of family members on the board, stronger family power, and smaller boards are associated with higher firm performance. In addition, the positive association between the ownership of the second largest owner and firm performance also occurs when the second largest owner is a member of the controlling family, but the association is stronger when the second largest owner is a non-family member. We further test the relative importance of these test variables and find that ownership structure is more associated with firm performance than board structure.

This paper studies whether and how Big-4 firms provide higher-quality audits than non-Big-4 firms. Specifically, we first examine a Big-4 effect and then explore three sources of the Big-4 effect. To test the Big-4 effect, we use a unique data set of individual audit partners for a large sample of private companies and a novel research design exploiting the fact that auditees may follow the auditor who switches affiliation from a non-Big-4 firm to a Big-4 firm. Thus, we compare audit quality and audit fees of the same partner–auditee pairs before and after the switch. The results show that the Big-4 effect exists in the private-firm segment. More important, we find evidence for three sources of the Big-4 effect. First, Big-4 firms are able to recruit non-Big-4 partners who deliver higher audit quality than other non-Big-4 partners in the preswitch period. Second, enhanced learning has taken place after the switch. Third, the increased audit quality can also be attributed to stronger incentives/monitoring. These are new findings to the literature. This paper was accepted by Suraj Srinivasan, accounting.

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