Audits as a Corporate Governance Mechanism: Evidence from the German Market

Posted: 1 Jul 2003

See all articles by Hollis Ashbaugh Skaife

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis

Terry Warfield

University of Wisconsin - Wisconsin School of Business

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Abstract

The purpose of this study is to investigate the corporate governance role of external audits in a setting where companies traditionally rely more on debt than equity capital. We partition the German audit market into two groups: the first group comprises the top two auditors on the basis of market share, which we classify as the dominant auditors, and the other group consists of all other auditors. We predict that a German company's demand for audit services from one of the two groups of auditors is determined by its set of stakeholders. We find a positive relation between German companies' demand for dominant audit suppliers and the variables that we use as proxies for the stakeholder interests of creditors, dispersed shareholders, and foreign suppliers. We also find a negative association between German companies' dominant audit supplier choices and the stakeholder interests of closely-held companies. Our results suggest that audits play a corporate governance role conditional on companies' relations with alternative stakeholders.

Keywords: corporate governance, audit markets, auditor choice

JEL Classification: G34, M49

Suggested Citation

Skaife, Hollis Ashbaugh and Warfield, Terry D., Audits as a Corporate Governance Mechanism: Evidence from the German Market. Available at SSRN: https://ssrn.com/abstract=421008

Hollis Ashbaugh Skaife (Contact Author)

Graduate School of Management, UC-Davis ( email )

Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States

Terry D. Warfield

University of Wisconsin - Wisconsin School of Business ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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