Ownership Structure and the Demand for Auditor Quality
37 Pages Posted: 21 Nov 2017 Last revised: 21 Jul 2018
Date Written: May 29, 2018
We examine the effect of ownership structure on the demand for high quality auditors. Prior literature indicates that the demand functions for auditors may be different in private companies than in public companies due, in part, to more significant agency costs for public companies. Using data from publicly traded and privately owned banks of comparable size, we find that private banks are less likely to hire industry expert auditors than public banks, but are just as likely to hire non-expert Big 4 auditors. We also find that both private and public banks pay higher audit fees for Big 4 auditors, but public banks pay a premium for industry experts while private banks pay lower fees. Overall, our study provides further evidence that differences in agency costs between public and private companies impacts the demand for auditors. Our findings suggest that auditor demand in public banks may be driven by audit quality, while the auditor demand in private banks is driven by price competition.
Keywords: ownership structure, auditor quality, auditor choice, audit fees, banking
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