Earnings management, audit committee effectiveness and the role of blockholders ownership: evidence from UK large firms

Abstract

The existing literature documents that the financial reporting quality is higher when firms have effective audit committees. However, recent studies find that audit committees are not effective in family firms where agency conflicts arise between controlling and non-controlling shareholders. Extending the previous findings, this study investigates the effectiveness of audit committees in firms with similar agency conflicts when one owner obtains effective control of the firm. Compared to firms with a low level of block ownership, high-blockholder firms face less agency problems due to the separation of ownership and management, but more severe agency problems between controlling (blockholders) and non-controlling shareholders. Using a unique hand-collected sample, using the largest 350 UK firms for three years from 2005 to 2007, and shows that firms with effective audit committees have less earnings management. This study also documents that the monitoring effectiveness of audit committees is moderated in firms with high blockholder ownership.