Ownership Concentration, Family Control, and Auditor Choice: Evidence from an Emerging Market

42 Pages Posted: 6 Feb 2012

See all articles by Salim Darmadi

Salim Darmadi

Indonesia Financial Services Authority (OJK)

Date Written: February 6, 2012

Abstract

This empirical study extends the existing, yet limited, literature on the influence of ownership concentration and family control on auditor choice. Following prior studies, a firm is considered using a higher-quality audit when its external auditor is one of Big 4 audit firms. The sample consists of 787 firm-year observations of public firms listed on the Indonesia Stock Exchange (IDX) in the financial years 2005-2007. Empirical evidence obtained reveals that firms with larger ownership concentration are more likely to hire a Big 4 auditor. Hence, in such firms, high-quality audits are employed to mitigate agency issues. However, when the controlling shareholder is a family, the association between ownership concentration and demands for high-quality auditors turns negative, implying that family-controlled firms tend to sustain opaqueness gains by hiring lower-quality auditors.

Keywords: Auditor choice, Big 4, corporate governance, external audit, Indonesia

JEL Classification: G32, G34, M41, M42

Suggested Citation

Darmadi, Salim, Ownership Concentration, Family Control, and Auditor Choice: Evidence from an Emerging Market (February 6, 2012). Available at SSRN: https://ssrn.com/abstract=1999809 or http://dx.doi.org/10.2139/ssrn.1999809

Salim Darmadi (Contact Author)

Indonesia Financial Services Authority (OJK) ( email )

Jalan M.H. Thamrin No. 2
Jakarta, Jakarta 10350
Indonesia

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