Do Audit Committees Reduce the Agency Costs of Ownership Structure?
Charlie X. Cai
University of Leeds - Leeds University Business School (LUBS)
University of Strathclyde, Glasgow - Department of Accounting and Finance
Xi'an Jiaotong University (XJTU) - School of Management
Fu Dan University
May 1, 2011
We investigate the agency costs of corporate ownership structure and the role of audit committees in mitigating their effect. Using China as a laboratory, where audit committees are voluntary, we study the demand for and value relevance of audit committees conditional on the various agency costs of corporate ownership. Audit committees are shown to complement existing internal governance systems by reducing the agency conflicts embedded in ownership structure. They are always value relevant, the magnitude of which depends upon the level and complexity of the ownership lattice. Finally, audit committees substitute for inefficient external regulatory environments, particularly where weak legal institutions predominate. Our results are robust to firm size, investment level and financial leverage.
Number of Pages in PDF File: 59
Keywords: Government Owned Enterprises, Corporate Governance, Auditing, Audit Committee, Pyramid Groups
JEL Classification: G15, G38, G30working papers series
Date posted: February 14, 2009 ; Last revised: May 11, 2011
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