Dual-Class Shares and Audit Pricing: Evidence from the Canadian Markets

25 Pages Posted: 13 Jan 2006 Last revised: 2 Sep 2010

Samer Khalil

American University of Beirut

Michel Magnan

Concordia University - Department of Accountancy

Jeffrey R. Cohen

Boston College - Department of Accounting

Date Written: April 1, 2008

Abstract

This study investigates whether i) audit fees vary with the discrepancy, or wedge, between cash flows rights and control rights arising from the presence of dual class shares structures, and whether ii) directors' independence and institutional block holders presence moderate this association. Relying on a dual framework for audit pricing, we posit that dual class shares affect audit fees through their effect on the supply and demand for assurance services (Wang 2006). On the supply side, external auditors conduct wider (narrower) scope audits in dual (single) class firms depending on whether dual class shares increase (reduce) auditors' litigation risk. Independent directors and institutional block holders are likely to induce more intense monitoring, thus potentially leading auditors to reassess downward auditors' litigation risk. Such reassessment could lead to a reduction in audit procedures, audit costs, and audit fees. Regarding the demand for audit services, block holders in dual class firms are likely to demand narrower (wider) scope audits in dual (single) class firms in order to reduce the likelihood of detecting material misstatements in financial statements (to enhance contracting terms with external parties wary about agency costs arising from dual class shares; Wang 2006). Independent directors and institutional block holders are likely to demand wider scope audits in order to protect shareholders' interests, to safeguard their reputation, and to reduce their exposure to legal liability. Results are primarily consistent with prior findings documented by Fan and Wong (2005). Audit fees are positively associated with the wedge between cash flow rights and control rights. However, the association between audit fees and the wedge ratio is not moderated by board independence or institutional investors' presence.

Keywords: Audit pricing, Audit fee, Dual class shares, Private benefits of control

JEL Classification: G32, G34, M41, M49, K22

Suggested Citation

Khalil, Samer and Magnan, Michel and Cohen, Jeffrey R., Dual-Class Shares and Audit Pricing: Evidence from the Canadian Markets (April 1, 2008). Auditing: A Journal of Practice & Theory, Vol. 27, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=875352 or http://dx.doi.org/10.2139/ssrn.875352

Samer K. Khalil (Contact Author)

American University of Beirut ( email )

Suliman S. Olayan School of Business
P.O.Box 11-0236
Beirut 1107 2020, Riad El-Solh
Lebanon

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Jeffrey R. Cohen

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3165 (Phone)
617-552-2097 (Fax)

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