Agency costs and audit quality: evidence from France

Abstract

This paper examines the influence of agency conflicts on the demand for audit quality by French listed companies. The French environment is characterized by constraining regulations on independence and informational duties of statutory auditors, a weak contribution of financial markets in corporate financing as compared to Common Law countries, and correlatively a higher ownership concentration. Two agency costs hypotheses are tested: ownership diffusion as a proxy for shareholders managers conflicts, and leverage in high-Investment-Opportunity-Set companies, supposing an increased expropriation risk for debtholders. Audit quality is proxied with a triple distinction of auditors: Big Six, national Majors and Local audit firms. Empirical results do not support the ownership hypothesis and corroborate the debt-IOS one. This suggests that: (1) the Anglo-American principal-agent model has little explanatory power in the concentrated ownership framework of French corporate governance; (2) audit quality appears as a valuable monitoring device that may improve debtholders' protection, enhancing the reliability of accounting numbers when the risk of wealth transfers at the expense of debtholders is significant. Elsewhere, size, complexity and international operations of audited clients do not represent competition barriers between Big Six and national Majors, supporting a significant competition between both categories of audit firms on the market of listed companies.