Title: Audit quality and owner-manager agency costs: evidence from China

Authors: Li Dang, Qiaoling Fang

Addresses: College of Business, California Polytechnic State University, San Luis Obispo, CA 93407, USA. ' Department of Accounting, College of Management, Ocean University of China, No. 238, Songling Road, Qingdao 266100, Shandong, China

Abstract: Agency theory suggests that conflict interests between managers and owners cause management shirking and associated agency costs. An audit is a monitoring mechanism that provides an independent check on accounting information and reduces agency costs (Jensen and Meckling, 1976). Therefore, given severe owner-manager agency problems, higher audit quality should be associated with lower client company owner-manager agency costs. The purpose of this study is to empirically test this relation. In China, owner-manager agency problems are severe given extremely low or no management ownership. Moreover, there is a lack of variations in management holdings across Chinese public companies. Such an environment allows us to examine the role of audits in reducing owner-manager agency costs. Using a sample of Chinese listed companies, we find that observations with higher quality audits show lower owner-manager agency costs. Such a result suggests that in an emerging market, higher quality audits more effectively reduce agency costs.

Keywords: audit quality; agency costs; emerging markets; China; owner-managers; agency theory; auditing; audits; auditors; shirking; conflict of interests; monitoring mechanisms; independent checks; accounting information; cost reduction; client companies; clients; management ownership; public companies; shares; shareholders; shareholdings; listed companies; business innovation; R&D; research and development.

DOI: 10.1504/IJBIR.2011.037256

International Journal of Business Innovation and Research, 2011 Vol.5 No.1, pp.46 - 62

Published online: 28 Feb 2015 *

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