Audit quality and owner-manager agency costs: evidence from China

Abstract

Agency theory suggests that conflict interests between managers and owners cause management shirking and associated agency costs. An audit is a monitoring mechanism that provides an independent check on accounting information and reduces agency costs (Jensen and Meckling, 1976). Therefore, given severe owner-manager agency problems, higher audit quality should be associated with lower client company owner-manager agency costs. The purpose of this study is to empirically test this relation.In China, owner-manager agency problems are severe given extremely low or no management ownership. Moreover, there is a lack of variations in management holdings across Chinese public companies. Such an environment allows us to examine the role of audits in reducing owner-manager agency costs.Using a sample of Chinese listed companies, we find that observations with higher quality audits show lower owner-manger agency costs. Such a result suggests that in an emerging market, higher quality audits more effectively reduce agency costs.

دور جودة المراجعة فی تخفیض تکالیف الوکالة وتکلفة رأس المال -دراسة تطبیقیة علی الشرکات المسجلة فی البورصة المصریة(باللغة الانجلیزیة)

“…indicating that audit quality measured by the size of audit firm has a significant positive effect on asset utilization ration ratio of the firm which in turn reduces agency cost for firms listed in the Egyptian stock exchange and these results are consistent with (Dang and Fang, 2011;Owusu and Weir 2018)…”

“…This result basically provides evidence for accepting hypothesis H 1 which is in the line with the researcher's expectations that audit quality reduces agency costs and agrees with the results of prior studies (Clinch et al 2012;Lai and Liu 2017). Concerning the control variables including firm size and leverage, results from table 7 show firm size with a positive and insignificant coefficient of (0.459, p-value=0.08 >0.05 and 0.436, P-value= 0.099> 0.05) for Big4 and ISPX respectively which contradicts with the findings of prior studies such as Singh and Davidson (2003) and Dang and Fang, (2011). While results showed leverage with a positive significant coefficient of (0.17, p-value 0.000 < 0.05 and 0.175, P-value =0.00< 0.05) for Big4 and ISPX respectively providing support to studies as Fleming and McCosker, 2005; Dang and Fang, 2011; Owusu 2018).…”

“…(p.186, DeAngelo 1981). Prior studies have extensively examined the demand for audit quality at different degrees of agency problem and cost of equity capital (Chow 1982;Francis and Wilson 1988 The problem is that most of these studies had been conducted in developed markets economies which are characterized to have strong legal investor protection with few studies had been performed in emerging markets (Dang and Fang 2011;Chen et al 2011;Houque et al 2017). These markets-unlike developed countries-are characterized by weak legal investor protection which make the results of these studies can't be generalizable to emerging markets like Egypt due to different institutional setting, regulations, rules and economic environment.…”

“…The research study used two control variables which are: Firm Size and Leverage that might affect Agency Cost as well as the Cost of Equity capital. Firm Size (FS jt ) measured by the natural logarithm of total assets(Dang and Fang 2011;Khan et al 2016). …”

أثر جودة المراجعة على جودة التقاریر المالیة(باللغة الانجلیزیة)

“…Big4 audit firms usually have more to lose such as reputation, in addition, they have higher technologies and better financial and human resources, which can be the reasons behind the high audit quality and high financial reporting quality they offer compared to non-Big4 audit firms (DeAngelo 1981;Gul et al 2003;Chen et al 2013). Previous studies used the audit firm size as a measure of the audit quality (Chowdhury,et al 2018;Clinch et al 2012;Dang and fang 2011). Thus, this proxy will be measured in this research as a binary variable, taking the value of "1" in the case of Big4 and "0" in the case of Non-Big4 (Fernando et al 2010).…”