Do Audit Committees Reduce the Agency Costs of Ownership Structure?

59 Pages Posted: 14 Feb 2009 Last revised: 11 May 2011

See all articles by Charlie X. Cai

Charlie X. Cai

University of Liverpool Management School

David Hillier

University of Strathclyde - Department of Accounting and Finance

Gao-Liang Tian

Xi'an Jiaotong University (XJTU) - School of Management

Qinghua Wu

Fu Dan University

Date Written: May 1, 2011

Abstract

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.

Keywords: Government Owned Enterprises, Corporate Governance, Auditing, Audit Committee, Pyramid Groups

JEL Classification: G15, G38, G30

Suggested Citation

Cai, Charlie Xiaowu and Hillier, David and Tian, Gao-Liang and Wu, Qinghua, Do Audit Committees Reduce the Agency Costs of Ownership Structure? (May 1, 2011). Available at SSRN: https://ssrn.com/abstract=1339232 or http://dx.doi.org/10.2139/ssrn.1339232

Charlie Xiaowu Cai (Contact Author)

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

David Hillier

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
44 0141 330 4809 (Phone)
44 0141 330 4442 (Fax)

Gao-Liang Tian

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Qinghua Wu

Fu Dan University ( email )

Beijing West District Baiyun Load 10th
beijing west district baiyun load 10th
shanghai, 100045
China
010-63409999-4046 (Phone)
010-63434167 (Fax)

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