The impact of ultimate ownerships on audit fees: evidence from Chinese listed companies

Abstract

This paper investigates the relationships between ultimate ownerships and audit fees (ADFEE). Using the data of 1428 Chinese listed companies in 2008, our empirical results show ADFEE are lowest for companies controlled by central government, followed by companies controlled by local government. In addition, we reveal that the longer the control chain from the listed company to its ultimate owner, the higher the ADFEE that company will pay. We also find that there is a negative relationship between the discrepancy and ADFEE when we pool our sample together. However, when we divide our samples into large firms and small firms, we find that such a negative relationship only holds for big-size firms while for small-size firms, ADFEE are positively correlated. This discrepancy being due to small firms’ lack of bargain power and the increase in auditing risk. In addition, we find that company size moderates the effect of such discrepancies on ADFEE in a nonlinear fashion.

Keywords:

• ultimate owner
• ownership structure
• pyramid hierarchy
• audit fees

JEL codes:

• G34
• M42
• M48

Notes

1. The discrepancy between control rights and cash flow rights arises due to: (1) the pyramid ownership structure or (2) the dual classes of shares. Literature shows that the discrepancy between control rights and cash flow of Canadian firms is about 7.54 (Khalil et al. 2008), while in our sample, that discrepancy for Chinese firms is only 1.5.

2. For example, Palmrose (1982), Taylor and Baker (1981), Firth (1985), Simon et al. (1986), Francis (1984), Francis and Simon (1987), Francis and Stokes (1986), Craswell et al. (1995), Joshi and AL-Bastaki (2000), and Wu (2003).

3. Such as the works of: Taffler and Ramalinggam (1981), Palmrose (1986), Francis and Simon (1987), Simon and Francis (1988), Chan et al. (1993), DeFond et al. (2000), McMeeking et al. (2001), Wu (2003), and Chen et al. (2007).

4. Following La Porta et al. (1999) and Fan et al. (2010), the voting rights is determined as the ownership percentage at the weakest link of the pyramidal chain, as the ability to make decision on important issues.

5. Defined as Choi et al. (2008) and Fan et al. (2010), the cash flow right is estimated by the ownership percentage of each link across the chain, as the claims on cash payouts or dividend.

6. ST is the abbreviation of special treatment, it means that the listed company has abnormal financial and other performance, including: (1) reported earning is negative in 2 consecutive accounting years; (2) auditors express unclean audit opinion; (3) book value of equity is lower than registered capital; and (4) the adjustment in recent audited financial report results in loss in two consecutive accounting years.

7. This website is authorized by China Securities Regulatory Commission. All the financial reports of listed companies in China should be posted on this website officially.

8. This database is developed by GTA Information Technology Company Limited and Hong Kong Polytechnic University, mainly focus on the capital market in China.