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

Li Dang and Qiaoling Fang

International Journal of Business Innovation and Research, 2011, vol. 5, issue 1, 46-62

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. (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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