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Audit quality and owner-manager agency costs: evidence from China

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  • Li Dang
  • Qiaoling Fang

Abstract

Agency theory suggests that conflict interests between managers and owners cause management shirking and associated agency costs. An audit is a monitoring mechanism that provides an independent check on accounting information and reduces agency costs (Jensen and Meckling, 1976). Therefore, given severe owner-manager agency problems, higher audit quality should be associated with lower client company owner-manager agency costs. The purpose of this study is to empirically test this relation. In China, owner-manager agency problems are severe given extremely low or no management ownership. Moreover, there is a lack of variations in management holdings across Chinese public companies. Such an environment allows us to examine the role of audits in reducing owner-manager agency costs. Using a sample of Chinese listed companies, we find that observations with higher quality audits show lower owner-manager agency costs. Such a result suggests that in an emerging market, higher quality audits more effectively reduce agency costs.

Suggested Citation

  • Li Dang & Qiaoling Fang, 2011. "Audit quality and owner-manager agency costs: evidence from China," International Journal of Business Innovation and Research, Inderscience Enterprises Ltd, vol. 5(1), pages 46-62.
    • Handle: RePEc:ids:ijbire:v:5:y:2011:i:1:p:46-62
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    Cited by:

    1. Zou, Ying & Zhong, Zhuoming & Luo, Jia, 2021. "Ethnic diversity, investment efficiency, mediating roles of trust and agency cost," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 410-420.
    2. Xingqiang Du, 2013. "Does Religion Matter to Owner-Manager Agency Costs? Evidence from China," Journal of Business Ethics, Springer, vol. 118(2), pages 319-347, December.

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