Dual‐Class Equity Structure, Nonaudit Fees and the Information Content of Earnings

Flora Niu

Corporate Governance: An International Review, 2008, vol. 16, issue 2, 90-100

Abstract: Manuscript Type: Empirical Research Question/Issue: This paper examines the relationship between dual‐class share structure and the purchase of nonaudit services, and the extent to which the market's valuation of accounting information is influenced by the perception of auditing compromise resulting from such purchases. Research Findings/Results: Using a sample of Canadian companies from 2003–2004, we find that dual‐class firms pay a larger amount of nonaudit fees to the auditors, relative to single‐class firms, both in the absolute dollar amount and as a ratio of total audit fees. In addition, the returns‐earnings association is significantly lower for dual‐class firms than for their counterparts, and there is a further valuation discount as dual‐class firms increase nonaudit service purchases. Theoretical Implications: We argue that severe agency problems inherent from the deviation from the one‐vote‐per‐share structure lead to greater demand for economic bonding with the auditors via the purchase of nonaudit services. This study contributes to the growing body of nonaudit service literature by documenting the empirical link between ownership of control and nonaudit purchases. Practical Implications: The results indicate that investors believe a larger amount of nonaudit services highlights the underlying agency problems and compromises auditor independence for firms with a separation of cash flow rights and voting rights. The findings suggest that regulators in Canada and in other developed countries, when revising their future regulations on audit committees, may need to emphasize the role of restricted‐class shareholders in bolstering the audit committee function and the auditing process.

Date: 2008
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https://doi.org/10.1111/j.1467-8683.2008.00665.x

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