When Does Ownership Matter? Board Characteristics and Behavior

Abstract

We extend agency theory with the notion that boards have distinct incentives and abilities to monitor management and develop a contingency approach to explain how firm ownership influences the monitoring function of the board — measured as the magnitude of external audit fees contracted by the board. Analyzing Continental European companies, our results demonstrate that while audit services and board independence are complementary when ownership is dispersed, this is not the case when ownership is concentrated. This suggests that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the identity of the controlling shareholder. We uncover that the influence of board characteristics on audit fees is larger for family and non-financial controlled firms than for bank controlled firms, relative to firms with dispersed ownership. In total, we find that board monitoring is contingent on the firm’s ownership structure, which demonstrates that board strategic behavior is contextually dependent. We argue that theory and empirical research in corporate governance should progress to a more context dependent analysis, which, in turn, will prove useful for practitioners and policy makers.