Founding family and auditor choice: Evidence from Taiwan

Abstract

Manuscript Type Empirical Research Question/Issue From an agency perspective, we investigate whether family ownership and control configurations are systematically associated with a firm's choice of auditor. Our analysis focuses on three different characteristics of family ownership and control: family ownership (cash flow rights), disparity between cash flow and voting rights held by family owners (cash–vote divergence), and the family identities of CEOs. Research Findings/Insights Our findings suggest that different family ownership and control configurations lead to different agency effects. The alignment effect prevails in family firms with greater family ownership, founder CEOs, and professional CEOs, whereas the entrenchment effect prevails when there is greater cash–vote divergence. Despite the presence of two distinct types of agency effects, regardless of differences in family ownership and control configurations, none of these firms is inclined to appoint higher‐quality auditors. Theoretical/Academic Implications This study advances our understanding of the varied agency effects arising from family ownership, cash–vote divergence, and the family identities of CEOs, as well as the impact of family ownership and control features on auditor choice. Our empirical evidence provides a unique insight, showing that higher‐quality auditors do not tend to be appointed in firms where family alignment with outside investors is relatively strong, as this lowers demand for such auditors. In addition, although family entrenchment may create greater outside investor demand for higher‐quality auditors, such demand is difficult to realize. Practitioner/Policy Implications Auditors are an important external governance mechanism. This study offers insights for policymakers, family owners, auditors, and other capital market participants, with regard to the varied effects of different family ownership and control features on auditor choice.

Ownership structure, board of directors and firm performance: evidence from Taiwan

“…As a result, a family-controlled firm may provide a competitive advantage and improve firm performance (Anderson and Reeb, 2003). A number of other empirical studies also show that family ownership is correlated with better performance (Bonilla et al, 2010;Carney and Gedajlovic, 2002;Hsu et al, 2018;Joh, 2003;Maury, 2006;Villalonga and Amit, 2006;Wang and Shailer, 2017). When all the evidence is taken together, since the impact of family ownership on firm performance is an empirical issue, the following hypothesis is then proposed:…”

Determinants of auditor choice: Review of the empirical literature

“…Chen, Cheng, and Dai () argued that the selection of an auditor depends on the person or individuals who run the business, because the founder, descendants, and professional CEOs vary with respect to their sense of identity, psychological attachment to the firm, and management incentive mechanisms. Following this, Hsu et al () categorized family firms as those run by a founder CEO, descendant CEO, or professional CEO to examine their variability in selecting an auditor. Consistently, Hsu et al () evidenced that family firms do not tend to appoint high‐quality auditors when family alignment is present (i.e., high family ownership and the presence of a founding CEO), due to less outside investor demand for such auditors.…”

“…Following this, Hsu et al () categorized family firms as those run by a founder CEO, descendant CEO, or professional CEO to examine their variability in selecting an auditor. Consistently, Hsu et al () evidenced that family firms do not tend to appoint high‐quality auditors when family alignment is present (i.e., high family ownership and the presence of a founding CEO), due to less outside investor demand for such auditors. AL‐Qadasi, Abidin, and Al‐Jaifi () suggested that Malaysian family firms, although they rely more upon external as opposed to internal auditors, are unlikely to appoint industry‐specialist auditors.…”

“…Many existing research studies can be further expanded by adopting an institutional theoretical framework. These include: (i) coercive pressure (e.g., mandatory audit requirements; Lennox & Pittman, 2011), managers' legal liabilities (Chi & Weng, 2014;Gerakos & Syverson, 2015), corporate social responsibility ratings (Sun et al, 2017), and country-level legal environment (Francis et al, 2009;Guedhami & Pittman, 2006;Piot, 2001); (ii) mimetic effect (e.g., professional networks; Carson, 2009), governance models (Piot, 2005), and personal connections and interlocks (Houghton & Jubb, 2003;Johansen & Pettersson, 2013); and (iii) normative conformity (e.g., culture; Hope et al, 2008) and professional CEOs (Hsu et al, 2018).…”

Corporate Governance and Auditor Choice in Kuwait

“…In addition, previous related studies (e.g., Hope et al 2008;Ben-Hassoun et al 2018) suggest that company's leverage may influence auditor choice as it is considered a proxy for audit risks (e.g., Chan et al 1993;Whisenant et al 2003). Accordingly, and consistent with similar previous research (e.g., Hsu et al 2018;Ben-Hassoun et al 2018;Hsu et al 2015;Lin and Liu, 2009), the LEV variable is added to the regression model as a measure of company's leverage. This variable is measured as the company's long-term liabilities to total assets, and is expected to have a positive regression coefficient.…”