Do Auditors Price Common Ownership?

Abstract

Common ownership (i.e., financial institutions’ block holding of stock in industry rivals) and its implications for investors are matters of current interest and debate (SEC 2018). Motivated by this debate and the salience of common ownership, we investigate whether and how auditors price common ownership. Consistent with the notion that common ownership improves monitoring, we find that common ownership is related to lower audit fees (about 6 percent lower). Further, we find that the reduction in audit fees is more pronounced for companies whose common owners (1) have stronger incentives to monitor, and (2) have “scale” in monitoring. Using path analysis we find that common ownership contributes to lower audit fees through improved earnings quality. Collectively, our findings speak to the effect of monitoring mechanisms from common ownership and are of potential interest to investors and the SEC as they attempt to assess the broader implications of common ownership.

Keywords: Common ownership, audit pricing, long-term and transient institutional investors, SEC

JEL Classification: M4; M42