Capital Market Participants Research Articles

CEO political ideology and credit risk assessment

PurposeThe authors examine the role of CEO political ideology in the credit rating process.Design/methodology/approachThis study adopts a quantitative method with panel data regressions using a sample of 5,211 observations from S&P 500 firms from 2001 to 2012.FindingsThe authors find that firms run by Republican-leaning CEOs, who tend to have conservative political ideologies, enjoy more favorable credit ratings than firms run by Democratic-leaning CEOs. In addition, the association between CEO political ideology and credit ratings is more pronounced for firms with high operating uncertainty, low capital intensity, high growth potential, weak corporate governance and low financial reporting quality. Finally, the authors find that CEO political ideology affects a firm's cost of debt incremental to credit ratings, consistent with debt investors incorporating CEO political ideology in their pricing decisions.Research limitations/implicationsLeveraging CEO political ideology, the authors document that credit rating agencies incorporate managerial conservatism in their credit rating decisions. This finding suggests that CEO political ideology serves as a meaningful signal for managerial conservatism.Practical implicationsThe study suggests that credit rating agencies incorporate CEO political ideology in their credit rating process. Other capital market participants such as auditors and retail investors can also use CEO political ideology as a proxy for managerial conservatism when evaluating firms.Social implicationsThe paper carries practical implications for practitioners, firm executives and regulators. The results on the association between CEO political ideology and credit ratings suggest that other financial institutions could also incorporate CEO political ideology in their evaluation in their evaluation of firms. For example, when evaluating audit risk and determining audit pricing, auditors may add CEO political ideology as a risk factor. For firms, especially those that have Democratic-leaning CEOs, the authors suggest that they could reduce the unfavorable effect of CEO political ideology on credit ratings by improving their corporate governance and financial reporting quality, as demonstrated in the cross-sectional analyses. Finally, this study shows that CEO political ideology, as measured by CEOs' political contributions, is closely related to a firm's credit ratings. This finding may inform regulators that greater transparency for CEOs' political contributions is needed as information on contributions could help capital market participants perform risk analyses for firms.Originality/valueCredit rating agencies release their research methodologies for determining corporate credit ratings and identify managerial conservatism as an important factor that affects their risk assessments. The extant literature, however, has not empirically investigated the relation between credit ratings and managerial conservatism, which, according to behavioral consistency theory, can be proxied by CEO political ideology. This study provides novel empirical evidence that identifies CEO political ideology as an important input factor in the credit rating process.

Digital Engagement Practices in Mobile Trading: The Impact of Color and Swiping to Trade on Investor Decisions

As coined by the SEC, Digital Engagement Practices (DEPs) are visual cues and design features to engage investors on mobile trading platforms. With the rise of mobile stock trading, regulators and other capital market participants are concerned that these DEPs may cause retail investors to trade in ways they otherwise would not. Using an experiment, we examine the impact of two common DEPs in mobile trading platforms—color (i.e., the use of green or red to indicate performance) and allowing investors to swipe versus click and confirm to execute trades. Drawing from prior research, we predict that the color associated with firm information will interact with how investors execute their trades to affect investment decisions. Consistent with expectations, results show that investors make the largest investment in a firm when they swipe to trade and firm information is colored green, relative to when they click and confirm to trade or firm information is colored red, holding firm economics constant. Swiping to trade causes investors to focus relatively more on the upside of investing, but only when firm information is colored green and not when it is colored red. The color red leads to a muted effect of swiping to trade as investors experience more negative affect and focus relatively more on the downside of investing. Our study answers calls from regulators and academics to examine the effects of technology on information evaluation in investment decisions, and has important practical implications for investors. This paper was accepted by Ranjani Krishnan, accounting. Supplemental Material: The data is available at https://doi.org/10.1287/mnsc.2023.00379 .

Dividend payments and dividend smoothing in shipping companies

ABSTRACT We explore patterns and causal associations in the payout policies of 397 listed shipping companies. We find that payout policy in the shipping industry is associated with financial and governance characteristics of shipping companies, such as corporate age, profitability, and institutional ownership. These findings corroborate standard corporate-finance arguments on the emergence of payout policy as the outcome of mitigating agency conflicts and sending signals to capital market participants. Moreover, we find that the payout policy exhibits industry-specific features with shipping-market segment affiliations being important determinants of payouts (namely, containership companies exhibit higher payouts).

Is expanded auditor reporting meaningful? UK evidence

In 2013, the United Kingdom (UK) Financial Reporting Council (FRC) mandated independent auditors to provide an expanded audit report to disclose the risks of material misstatement and application of materiality. This paper examines the information content and economic consequences of the expanded auditor’s report and offers three main results. We first investigate the usefulness of auditor reporting regime change and find evidence that the new reporting regime has some influence on market indicators. Second, we document that firms receiving an expanded audit report with a higher level of disclosure on risks of material misstatement (materiality) exhibit significantly higher (lower) idiosyncratic risk, beta, and cost of equity. That is, the expanded auditor’s disclosure meaningfully affects firms’ risk fundamentals. Third, we find that information conveyed by the expanded auditor’s report impacts bid-ask spread, trading volume, volatility of market returns, and analyst forecast dispersion. Collectively, our analyses suggest that auditors provide information that meaningfully reflects the risks that the audited companies face. Furthermore, this information is associated with significant economic consequences for capital market participants, implying that it is not generic. This firm-specific and useful disclosure supports the FRC (followed by International Auditing and Assurance Standard Board (IAASB) and Public Company Accounting Oversight Board (PCAOB)) decision mandating the expanded audit report and provides evidence-based insights to major recent structural reforms aiming at proposing remedies to audit and capital market problems in the UK, and beyond.

How Integrated Thinking Can Be Detected in Management Disclosures in Annual Reports: Insights from a Large-Scale Text-Analysis Approach

ABSTRACTIntegrated Thinking has been promoted as a way of revolutionizing decision-making to create sustainable value. Our study shows how disclosures made by managers in annual reports can reveal aspects of Integrated Thinking within organizations. We develop a new dictionary-based measure of Integrated Thinking and apply our measure to two samples: 685 reports over a nine-year period from South Africa, where Integrated Reporting is mandatory, and a matched sample of European firms where such reporting is voluntary. We provide evidence that our Integrated Thinking measure is distinct from overall reporting quality and generic ESG and CSR disclosures and is more nuanced and variable over time than Integrated Thinking proxies used in the prior literature. Our new measure is positively and significantly associated with improved return on assets (influenced by real decisions made by managers rather than capital market participants). Our findings will be of interest to reporting bodies, practitioners, and academics.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: M12; M14.

Voluntary Gender Diversity Targets and Their Impact on Firm Performance and Firm Value

ABSTRACT Regulators in the United Kingdom recommend that 33 percent of board members of large U.K. firms be female by 2020. We use this setting to investigate whether greater female representation and any associated financial benefits can be achieved without establishing quotas. Using data between 2012 and 2018 for the Financial Times Stock Exchange (FTSE) 350 firms, we find a significant increase in female representation on boards in recent years, and the rate of increase in gender diversity is higher in these years. Our results also indicate that board gender diversity is positively associated with both financial performance and firm value. However, this association exists only in recent years. Finally, capital market participants value nonexecutive female board members more than executive female board members. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G30; G38; M41.

Cost uniqueness and information uncertainty

AbstractPrior literature has studied firm uniqueness and its implications for capital market participants by investigating earnings uniqueness. We recognize that cost and revenue uniqueness provide separate insights about firm uniqueness because different forces drive firm‐specific revenues and costs. Cost uniqueness is of special interest because costs are opaque to investors and more complex than revenues. Therefore, we examine how cost uniqueness affects information uncertainty from the perspective of external participants. We find that idiosyncratic stock return volatility increases with cost uniqueness independently and incrementally from revenue uniqueness. We validate these results with several cross‐sectional tests that provide insights into the forces that drive the association between information uncertainty and cost uniqueness. In addition, we find that higher cost uniqueness is associated with finer cost disclosure. Overall, we show that cost uniqueness is an important dimension of cost behavior that is linked to strategic decision‐making and affects uncertainty surrounding firm valuation.

준수 또는 설명 방식에 따른 기업지배구조 핵심지표 미준수 사유의 설명과 기업가치 간 관계

[Purpose] The Comply or Explain (CoE) approach, a core principle of the Corporate Governance Code, encourages an improvement in corporate governance by affording each firm the discretion to choose an appropriate governance structure and by allowing capital market participants to assess the firm’s governance choice. In order to investigate whether the corporate governance disclosure system works in accordance with the spirit of the CoE approach, this study analyzes the relationship between disclosure of the status of compliance with the key indicators of corporate governance and firm value.
 [Methodology] Using a sample of listed firms that disclosed corporate governance reports from 2019 to 2021, we perform regression analysis to examine the relationship between the disclosure of compliance or explanations for non－compliance with key corporate governance indicators and firm value. Additionally, we analyze the content of the explanations for noncompliance.
 [Findings] We find that compliance with key indicators has a positive relationship with firm value, while explanations for non－compliance do not exhibit a significant relationship with firm value. We also find that the majority of non－compliers state only the fact that they do not comply with the key indicators or provide general explanations exemplified in guidelines and best practices for their non－compliance.
 [Implications] The mandatory disclosure system for corporate governance reports, under the CoE approach, is intended to enhance transparency and the long－term value of the firm through effective disclosure of corporate governance and will apply to all listed firms in 2026. We find that the explanations provided by non－compliers are neither specific nor significantly related to firm value. These findings suggest the need for a discussion on ways to enhance the understanding of the essence of the CoE principles, particularly the Explanation (E) element, among both firms and information users and to improve the quality of corporate disclosures.

ОСОБЛИВОСТІ ІНВЕСТИЦІЙНОЇ ДІЯЛЬНОСТІ УЧАСНИКІВ РИНКІВ КАПІТАЛУ

Further development and intensification of investment activity in the capital markets are among the main factors behind Ukraine's intensive economic growth. Increased volumes of transactions with financial assets and other liabilities in the capital markets in the economic cycle lead to a natural interest of different groups of investors in these markets, in particular, the money market, as well as the securities and derivatives markets. At present, the capital markets of Ukraine are underdeveloped and lag far behind other markets of leading countries, failing to fulfill their main function—investment. The purpose of this article is to substantiate the theoretical and methodological foundations of investment activity of various groups of capital market participants. It is determined that the main subjects of capital markets are investors—individuals and legal entities that manage investment resources and purchase financial instruments in the capital markets to receive income/profit from investment and/or to acquire certain rights that they grant to owners of financial instruments in accordance with the law. Investors are divided into individual, institutional, and corporate investors. An important step towards studying different investors operating in the capital markets is their classification. Based on a synthesis of the work of Ukrainian and foreign researchers, the author summarizes their classification by the most important features, which are interpreted in various ways, affecting investment activity in the capital markets. Yield/profitability is necessary for attracting financial resources in the capital markets, providing consultations, and covering investment risks in the process of placing and circulating financial instruments. This function is realized by investment financial intermediaries, such as brokers, dealers, and investment banks. The real basis of any investment process is a consistently implemented investment cycle, which consists of stages. Each asset management entity is an integral part of investment processes that have their own goals and interests, without which investors lose their motivation to participate in investment activities, and therefore investment activity decreases at the macro level. Each stage of the asset management process of institutional investors is characterized by the performance of relevant works and operations carried out by various participants in capital markets, which are necessary to meet investment demand through the formation of investment proposals in such markets.

Transaction costs of the market impact of share trading: digital manoeuvring technologies

In the conditions of the new economic reality caused by the consequences of large-scale military aggression, increasing responsibility and trust between society and stock market participants is an essential resource for the development of financial and credit relations in Ukraine. Digitization of economic processes contributes to the development of applied developments and technology transfer, encouraging stock market participants to shape their transaction costs, taking into account the capabilities of the Government BI analytical system, BigData institutes, and derivatives. The article aims to develop the theoretical and applied principles of transaction costs of the market influence of share trading and the regulatory transformation of information provision. It is argued that the policy of economic recovery requires the application of the postulates of the theory of reindustrialization, the Growth Strategy Trilemma, and the integration of the theory of transaction costs with the path dependency theory for their consolidation in conditions of uncertainty. It was established that the industrial sector should contribute to the development of industrial corporations, which are essential for the branches of the national economy, to achieve competitive advantages of manufactured products and to improve the technological structure of exports. It was established that in the conditions of digitalization, public trust must be formed between the government, business, and science to overcome the technical autonomy of developers. The formation of transaction costs of the market influence of share trading is studied from the functional method of revealing the hierarchy, duration, and differentiation of the buying and selling processes. The classification of economic, organizational-management, and technical-technological dimensions of the stock market development is considered. Forecasting of trades in financial instruments at operators of organized capital markets indicates positive trends for 2023. The digitization of business processes facilitates the access of potential investors to mobilize the internal reinvestment potential of corporations. It provides open access to both integrated database platforms, which forecast cash flows and recognize the need for additional issuance of shares. Methodological and applied approaches to developing the market microstructure, integration, and dependence on regulatory transformations are characterized. It was determined that the development of the digital economy contributes to the creation of IT companies and innovative companies of small and medium businesses, which cannot be included in quotation lists of high levels. Therefore, specialized trading platforms, segments, and markets for small companies are promising for investment. It has been established that transaction costs are aimed at establishing communications, developing partner contacts, and concluding agreements. Therefore, developing professional standards of capital market participants by the roadmap for integrating Ukraine into the Single Digital Market of the European Union is a promising prospect. Keywords: stock trading, stock market, market microstructure, regulatory transformations, trading platform, digital technologies, financial and credit institutions, transaction costs, liquidity.

IS THERE EARNINGS DISCONTINUITY AFTER THE IMPLEMENTATION OF IFRS IN NIGERIA?

Earnings metrics are major financial indicators which capital market participants and investors focus on for informed decisions. Because reporting earnings increase may enhance firms’ stock price, many managers are motivated to avoid reporting earnings decreases, but prefer to consistently report increase earnings greater than its previous valuation. There is evidence that such practice has led to a situation of conspicuous upward shift in frequency of observations, starting from the left of identified earnings benchmark to the right. Recent studies have shown that a change in accounting regulation may have effects on the shape of the firm-year distribution of earnings. This paper examines the discontinuity evidence for Nigeria, in relation to the adoption of the international financial reporting standard. The aim is to establish whether discontinuity in earnings, represented by the asset-scaled net profits, as well the discontinuity in earnings-change, has reduced following the adoption. According to literature, the study employs three methods – empirical histogram, standardise differences tests and the permutation tests – to validate the aims. The findings suppose evidence for increase in discontinuity, indicating increased in small profits’ earnings management, after the adoption. Contrary, the evidence is not sufficient to conclude that the discontinuity has increase for the earnings-change. It can be argued that the adoption has not achieve much in ensuring firms are monitored against earnings management to avoid losses. The study has limitation, since it considers only the distributions of earnings and earnings-changes. The distribution of forecast errors is not investigated because such is influence by forecast management. Future studies may consider this for improvement.

The implications of firms' derivative usage on the frequency and usefulness of management earnings forecasts

AbstractWe investigate how firms' use of derivatives impacts voluntary disclosure and offer four main findings. First, we find that when firms begin using derivative instruments, they increase the frequency of management earnings forecasts. Second, using path analysis, we find a direct link between derivative usage and forecast frequency, as well as an indirect link through reduced earnings volatility. Third, we find that CEOs with more pronounced career concerns increase forecast frequency only when derivatives make earnings easier to forecast and find no evidence that investor demand drives the decision to provide a forecast. These results suggest that the primary mechanism for the association between derivative usage and forecast frequency is a reduction in the manager's costs of providing the forecasts. Finally, we find that the majority of derivative‐induced forecasts are uninformative to capital market participants, especially after FAS 161 provided the necessary underlying data to understand how firms use derivatives. Overall, we provide the first empirical evidence that firms that use derivatives issue more management forecasts, but we also find that these incremental forecasts are largely uninformative and appear driven by managerial career concerns.

Corporate risk disclosure and cost of capital: Does measurement matter?

AbstractThis study argues that different definitions/perceptions of risk information could affect investors' decisions differently. Using a sample of 328 non‐financial UK firms and departing from existing literature, this study measures corporate risk disclosure (RD) via computerized content analysis to capture four different perspectives of defining RD. This study investigates (i) the effects of these RD measures on the Cost of Capital (COC), (ii) the influence of analysts' coverage on the relationship between RD and COC, and (iii) whether the RD nature (favourable/unfavourable) might affect COC differently. Lenders and equity holders are found not to consider any risk information expressed as a variation around a target, while only lenders consider risk information that reveals negative outcomes. However, lenders and equity holders consider risk information that expresses negative and positive outcomes together. Besides, firms that disclose extra risk information and have a large analyst following suffer from a higher Cost of Equity (COE) compared with those with fewer analysts following. Additionally, lenders impose a lower interest rate on firms with a higher unfavourable RD, while equity holders ask for lower returns from the firms with a higher favourable RD. The study has significant implications for capital market participants, researchers, and policymakers.

Insider Horizon and Disclosure Policies

ABSTRACT We investigate the relationship between insider horizon and disclosure policy. First, we develop and analyze a rational expectations model assuming insiders are able to commit to a disclosure policy. Insiders with a short horizon prefer more disclosure and are willing to bear costs of disclosure to reduce information asymmetries among capital market participants. We then empirically test our predictions in the setting of newly public firms and firms where the CEO is approaching retirement. We find that firms with insiders that have a shorter horizon disclose more and experience lower information asymmetry. Our study contributes to the understanding of firms’ disclosure choices by suggesting that the horizon of insiders shapes a firm’s disclosure policy. JEL Classifications: G14; G32; D83.

Epistemic uncertainty in catastrophe models—A base level examination

AbstractIn this paper, we evaluate sources of variation in the output from catastrophe models with emphasis on the epistemic uncertainty in modeled expected losses. Using building data from the 34 buildings that comprised the California Northridge campus at the time of the Northridge earthquake, we explore the sensitivity of estimated average annual losses obtained from a cat model to the quality of model input. Namely, we consider how changes in four key model assumptions—building locations, building height, construction type, and the event catalog—affect cat model loss estimates. We find that accurate information on some input variables is critical (e.g., all steel construction) and the interaction between input variables should not be discounted. Our results have important implications for insurer decisions that are informed by the output of catastrophe models—product pricing, portfolio diversification and underwriting decisions, negotiations and discussions with regulators and similar activities with capital market participants. The financial impact of improving data quality and targeting data related to key model inputs for that insurer when at scale is not trivial. As such, this paper provides an impetus for establishing and improving benchmarks for model inputs.

Do family ownership and control influence the consequences of IFRS adoption?

AbstractResearch Question/IssueThis study investigates whether the impact of the mandatory adoption of the International Financial Reporting Standards (IFRS) on earnings management practices varies between family and non‐family firms. Specifically, we examine the effects of different family ownership configurations and the CEO family identity.Research Findings/InsightsWe find that firms in Taiwan use less accrual‐based earnings management (ABEM) under the IFRS but more real earnings management (REM). On average, IFRS adoption is less likely to result in upward ABEM and REM in family firms than in non‐family firms. However, family firms with greater family ownership, lower family cash–vote divergence, a founder CEO, or a professional CEO are more likely to promote the positive effect of the IFRS on ABEM and mitigate the negative effect of the IFRS on REM. Furthermore, these firms are less likely to substitute ABEM with REM after the transition to the IFRS.Theoretical/Academic ImplicationsWhile recent literature has paid increasing attention to various governance characteristics that shape management's reporting incentives and, thus, affect the consequences of mandatory IFRS adoption, we focus on family firms in which the principal–principal agency relationship between controlling owners and other shareholders is salient. We highlight the effect of family owners' different agency features in relation to a structural change in the accounting regime.Practitioner/Policy ImplicationsThis study addresses how a firm's corporate governance influences the net benefits of implementing new accounting standards. Our evidence offers insights to policymakers and capital market participants, showing that variations in family owners' reporting incentives may have different impacts on the consequences of adopting the IFRS.

Environmental Regulation and Corporate Environmental Performance: Evidence from Chinese Carbon Emission Trading Pilot

Using archival data of the Chinese A-share listed companies from 2011 to 2019, this article empirically examines the effectiveness of the Chinese carbon emission trading pilot, from the perspective of market-ranked corporate environmental performance. The main findings demonstrate that compared with companies not selected in the pilot, regulated enterprises tend to create a better environmental performance after the implementation of the pilot. Second, regarding the two possible influential channels, the lowering production level channel is empirically supported, while the increasing green investment channel lacks salient explanatory power. Finally, greater environmental pressures and better internal control quality present synergistic effects in amplifying the positive connection between the pilot and corporate environmental performance. Our conclusions remain valid under various robustness test methods. Potential related directions for future research are also identified and suggested in this article. Overall, using the Chinese carbon emission trading pilot as a research setting, our study provides additional evidence on whether and how environmental regulations affect corporate environmental performance ranked by capital market participants.

Pengaruh Struktur Modal Terhadap Harga Saham dengan Kinerja Perusahaan sebagai Variabel Intervening pada Perusahaan Property dan Real Estate

This study aims to examine the direct effect of capital structure on company performance and stock prices; direct effect of company performance on stock prices. As well as testing the indirect effect of capital structure on stock prices through company performance. Hypothesis testing is carried out using the Partial Least Square (PLS) approach. The sample used consisted of 40 property and real estate companies listed on the Indonesia Stock Exchange from 62 companies, for 2018-2020. Sampling was done by purposive sampling method. The results of this research show that capital structure has no effect on stock prices. Stock prices tend to be more influenced by the demand and supply of shares by capital market participants. This shows that it is likely that investors who will invest in property and real estate companies in the form of shares will consider other information about the company besides information about the company's capital structure. While the capital structure does not affect the performance of the company's performance. These results indicate that changes in the company's capital structure caused by an increase in the amount of company debt do not improve company performance. However, the company's performance has a positive effect on stock prices. Meanwhile, capital structure has no effect on stock prices through company performance. These results indicate that the company's performance is not able to mediate the relationship between capital structure and stock prices

PENERAPAN METODE ARIMA BOX-JENKINS UNTUK MEMPREDIKSI HARGA SAHAM DI PT ANEKA TAMBANG TBK

A capital market is a market in which long-term trading of financial assets takes place, or a market in which various financial instruments are traded. The development of capital markets promotes the economic development of the country. The form of investment in the capital market is in the form of shares. Because stock prices are constantly fluctuating, capital market participants need analysis to help predict future stock prices. PT Aneka Tambang TBK or ANTM for short is one of the stocks traded in Indonesia's capital market. This study applied the Box-Jenkins ARIMA method for the period from July 2021 to November 2021 to determine the optimal forecast model for stock price fluctuations of ANTM, and obtained forecast results in December 2021. It is intended to The best preserved model is his ARIMA model (3,2,0) and ANTM's December 2021 stock price forecast results are down.

Auditor choice and audit fees through the lens of agency theory: evidence from Chinese family firms

PurposeFrom an agency perspective, the authors investigate whether family ownership and control configurations are systematically associated with a firm's choice of auditor and audit fees. Agency theory is an economic theory that purposes the existence of a contract between two parties, principals and agents. Auditor choice and audit fees by family firms provide interesting insights given the unique nature of the agency problems faced by such firms.Design/methodology/approachThe authors employ Big-4 auditors (PWC, KPMG, E&Y and Deloitte) as a proxy for high quality auditor (Big N) for the auditor choice model. For the audit fee model, the dependent variable is the natural logarithm of audit fees (LnAF). The authors use two measures for family firm as explanatory variables: (1) a dummy variable (FAM_Control), which equals one if the firm is classified as a family firm and (2) FAM_Ownership, which is an indicator variable with a value of one if a firm has family members who hold CEO position, occupy board seats, or hold at least 10% of the firm's equity. Data of Chinese listed firms from 2011 to 2021 are used. The authors adopt the Heckman (1979) two-stage model to mitigate the potential endogeneity issue involved in the selection of Big-N auditors.FindingsThe findings suggest that compared with non-family firms, Chinese family firms have a less tendency to employ Big-4 auditors due to less severe agency problems between owners and managers. Additionally, Chinese family firms sustain higher audit fees than non-family firms. Similar to the prior literature, however, Chinese family firms audited by Big-4 auditors incur lower audit fees than family firms audited by non-Big-4 auditors in this study. In contrast to young-family firms, old-family firms are less likely to pick top-tier auditors and sustain lower audit fees. Consistent and robust results are found from endogeneity tests and sensitivity analyses.Originality/valueThe empirical evidence provides a unique insight, for accounting practitioners, policymakers, family owners and other capital market participants concerning the diverse effects of various family ownership and control features on selecting high-quality auditors and audit fees. This study advances the understanding, showing that a lower demand for audit quality occurs in Chinese family firms as they encounter less severe Type I agency problems. However, the more severe Type II agency problems in Chinese family firms sustain higher audit fees due to higher audit risk and greater audit effort.