Monitoring function of the board and audit fees: contingent upon ownership concentration

Abstract

PurposeThe aim of this paper is to revisit the board independence–audit fees (BI–AF) relationship while taking into account the ownership structure of the firm. Two effects are unfolding along the ownership concentration spectrum: separation of ownership and control (principal–agent problems) and separation of voting and cash flow rights (principal–principal problems).Design/methodology/approachThe study is conducted over a seven-year period (2002-2008) using panel regressions on a sample of Canadian publicly traded companies. The authors use a moderated regression analysis incorporating two-way interactive terms (ownership × BI) and a sub-group analysis.FindingsThe results show a positive and significant relationship between BI and AF when ownership is concentrated in the hands of a dominant/controlling shareholder. The higher the gap between voting and cash flow rights of the ultimate owner, the stronger the relationship between BI and AF. Overall, evidence supports both the demand-based perspective on AF and the expropriation effect argument.Practical implicationsResults support a one-size-fits-all approach to governance despite growing concerns from academics and interest groups about the appropriateness of pursuing such strategy when ownership is concentrated in the hands of a dominant/controlling shareholder.Originality/valueBy taking the excess voting rights into account (difference between voting rights and cash-flow rights of the ultimate owner), the authors propose a refined classification of the sample firms along the ownership concentration spectrum.