Disproportionate Insider Control and the Demand for Audit Quality

Authors

Arno Forst, The University of TexasFollow
Barry Hettler

Document Type

Article

Publication Date

2-2018

Abstract

We examine the relationship between disproportionate insider control, enabled through dual-class share structures, and the demand for audit quality. Using a comprehensive hand-collected sample of U.S. dual-class firms, we find that, consistent with outside shareholders’ increased demand for external monitoring, as well as self-bonding by entrenched insiders, disproportionate insider control is positively associated with the propensity to hire a Big 4 or industry specialist auditor, auditor independence, and audit fees. Corroborating a self-bonding explanation, additional analyses show that audit quality mitigates the negative association of disproportionate insider control and firm value. In expanded analyses, we also investigate the separate effects of insider voting and cash flow rights on the demand for audit quality in dual-class firms. Consistent with general agency theory, we find a decreased (increased) demand for audit quality from incentive-alignment (entrenchment) effects of ownership.

Comments

© 2019 American Accounting Association. All rights reserved. Original published version available at https://doi.org/10.2308/ajpt-52038

Recommended Citation

Forst, Arno, and Barry R. Hettler. 2019. “Disproportionate Insider Control and the Demand for Audit Quality.” AUDITING: A Journal of Practice & Theory 38 (1): 171–91. https://doi.org/10.2308/ajpt-52038.

First Page

171

Last Page

191

Publication Title

AUDITING: A Journal of Practice & Theory

DOI

10.2308/ajpt-52038