Demand for Audit Quality in Small Private Firms: Evidence on Ownership Effects

33 Pages Posted: 9 Jan 2009 Last revised: 6 Apr 2009

See all articles by Mervi Niskanen

Mervi Niskanen

University of Eastern Finland

Jukka Karjalainen

University of Eastern Finland - Business School

Jyrki Niskanen

University of Kuopio - Department of Business and Management

Date Written: March 25, 2009

Abstract

This study investigates the interaction between audit quality and agency costs, when managerial ownership is used as a proxy for agency costs. The literature on audit quality suggests that firms with high agency costs are more likely to demand audit quality. Our database enables us to compare the demand for audit quality with two different measures; demand for Big 4 auditors and certified auditors with strict professional requirements. The results show that an increase in managerial ownership decreases the likelihood that the firm will engage a Big 4 auditor but it does not have an impact on the demand for certified auditors. Our findings also support previous studies that suggest a nonlinear connection between managerial ownership and demand for audit quality in terms of Big 4 audits. This suggests that audits by Big 4 audit firms are used in informationally opaque private firms to overcome agency costs. We also find that the probability of choosing a Big 4 auditor increases with an increase in firm size and the presence of foreign sales. An increase in leverage increases the likelihood that the firm will engage a Big 4 auditor only in the larger firms and in firms, in which management ownership is above 50%.

Keywords: Agency Costs, Audit Quality, Managerial Ownership

JEL Classification: M49, M47, D82, G30, G32

Suggested Citation

Niskanen, Mervi and Karjalainen, Jukka and Niskanen, Jyrki, Demand for Audit Quality in Small Private Firms: Evidence on Ownership Effects (March 25, 2009). Available at SSRN: https://ssrn.com/abstract=1324599 or http://dx.doi.org/10.2139/ssrn.1324599

Mervi Niskanen (Contact Author)

University of Eastern Finland ( email )

PL 1627
Kuopio, 70211
Finland

Jukka Karjalainen

University of Eastern Finland - Business School ( email )

P.O. Box 1627
Kuopio, FI-70211
Finland

Jyrki Niskanen

University of Kuopio - Department of Business and Management ( email )

Kuopio, 70211
Finland

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