12 Jong-Hag Choietc2jae

7/31/2019 12 Jong-Hag Choietc2jae

1/22

The Association between Audit Fees and

the Ownership Structure

Jong-Hag Choi*

Se oul Nationa l Univers itySeoul, Korea

Su-Keun Kwak**

Se oul Nationa l Univers ity

Seoul, Korea

Hak Sik Yoo***

Se oul Nationa l Univers itySeoul, Korea

Abstract

Th is s tu dy examines th e associat ion b etween owners h ip s t ru cture an daudi t fess . Espec ia l ly , th i s s tudy focuses on the ownership s t ruc turemeasured by the divergence of control and ownership. If an owner ownsa c o m p a n y t h r o u g h t h e p y r a m i d a l s t r u c t u r e , i t i s p o s s i b l e t h a t t h evoting rights of the owner are greater than the cash flow rights of thesa m e owner . The di ffe ren ce could influen ce th e fi rms a u di t - re la ted

Seoul Journal of Business

Volume 13, Number 2 (December 2007)

* C o a u t h o r , As s is t a n t P r ofe s s o r o f Ac c ou n t i n g , C o lle ge of B u s i n e s s

Adm inistra tion , Seou l Nationa l University (acch oi@sn u .ac.kr).

** Coauth or, Professor of Accou nting, College of Bus ines s Adm inistra t ion, Seou l

National University ([email protected]).

*** Main au thor, Mas ter of Science, College of Bus ines s Adm inistra t ion, Seou l

Nationa l University (m oun tfly@ha n m ail.n et).

Th i s s t u d y is b a s e d o n t h e m a s t e r s d i s s e r t a t i on p a p e r b y t h e m a in a u t h o r

completed at Seoul National Universi ty on August 2007. The f irst and second

a u t h o r s s e r v e d a s d i s s e r t a t i o n c o m m i t t e e m e m b e r s . W e a p p r e c i a t e h e l p f u lco mm en t s p r o vid ed b y Ta i -S ik Ah n , Lee-Seo k Hwan g , Wo o n -Oh J u n g , an d

Chang-Woo Lee.


2/22

p o lic y a n d a u d i t or s b e h a vio r . Th i s s t u d y e x a m i n e s t h i s i s s u e b y

focus in g on a u dit fees.Using 436 f i rm-year observa t ions col lec ted over 2003-2005 per iod

from Korean stock market and the divergence data provided by KoreaFair Trade Commission, we examine above predict ion. The empiricalr e s u l t s r e v e a l t h a t t h e a u d i t f e e i s n e g a t i v e l y c o r r e l a t e d w i t h t h edivergence. It suggests that the audit quality is lower when there existg r e a t e r d i v e r g e n c e . I t i s b e c a u s e t h e d i v e r g e n c e i s r e l a t e d t o t h eincent ive for owners to expropriate minori ty shareholders . In order tohide the expropriation from outside minority shareholders, i t is possibletha t the owner asks the audi tor to provide low qua l i ty audi t se rvicewhich in tu rn resu lts in low au di t fees.

K e y w o r d s : a u d i t f e e s , c a s h f l o w r i g h t , v o t i n g r i g h t , o w n e r s h i ps t ruc tu re

INTRODUCTION

T h i s s t u d y e x a m i n e s t h e a s s o c i a t i o n b e t w e e n o w n e r s h i p

s t ruc ture and audi t fess . Especia l ly , th is s tudy focuses on the

o w n e r s h i p s t r u c t u r e m e a s u r e d b y t h e d i v e r g e n c e o f c o n t r o l

(voting right, i.e., the ability to elect the board of directors and

influence or dictate decisions that require shareholder approval)and ownership (cash flow rights i .e., claims on cash payouts or

d i v i d e n d ) . T h e d i v e r g e n c e i m p l i e s t h e d i f f e r e n c e b e t w e e n

controlling owners cash flow rights and voting rights. If an owner

owns a company through the pyramidal s tructure, i t is possible

th at t he voting righ ts of th e own er are greater th an th e cash flow

rights of the same owner . The d i f ference could inf luence the

firm s a u di t - re la ted pol icy and au di tors b eha vior . Th is s tu dy

exam in es this issu e.

Ownership of the public corporations across the world is not sow i d e l y d i s p e r s e d . I n s t e a d , h i g h e r o w n e r s h i p c o n c e n t r a t i o n

somehow prevails in the developed countries as well as in the

developing countr ies (Claessens e t a l . 2000; Facc io and Lang

2 0 0 2 ). O wn e r s h ip a n d c on t r o l s t r u c t u r e s o f m a n y p u b lic

c o m p a n ie s in E a s t As i a a n d We s t e r n E u r o p e a r e w el l

characterized by family-control, close relation of managers with

the controlling owners, and the controlling owners voting rights

exceeding cash flow rights (Claessens et a l . 2000; Faccio and

Lang 2002; Haw et al . 2004; LaPorta et a l . 1999; Shleifer and

Vish n y 199 7).

One of the most sal ient features of the ownership s tructure in

8 4 Seoul Journal of Business


3/22

E a s t A s i a i s t h e c o m p l i c a t e d p y r a m i d a l a n d c r o s s - h o l d i n g

ownersh ip s t ruc tu res1) typical among East Asian companies (Fan

and Wong 2002). Among these companies, controlling owners in

the region usually have higher level of control r ights than the

level of their equity ownership. Therefore, there exists divergence

between cash flow rights and voting rights. In prior accounting

and finance literature, this divergence is widely used as a proxy

for the information asymmetry or the risk (or the possibility) of

expropr ia t ions agains t minor i ty shareholders . This d ivergence

cou ld influ ence th e owner an d m an agers beha vior which in tu rn

in flu ence th e au dit fee.On the one hand, the divergence could be positively associated

w i t h a u d i t f e e s . T h e a u d i t o r i s p a i d a f e e t o a t t e s t t o t h e

as se r t ions con ta in ed in th e c lien t s fina n c ia l s t a t emen ts , a nd

presu m ably th e fee reflects th e work th e au ditor m u st p erform to

bea r the aud i t r i sk (Cho i e t a l . 2007a ; Craswe l l e t a l . 1995 ;

Simmunic 1980). Seetharaman et a l . (2002) f ind that audit fees

reflect r isk differences across countries with different level of

legal liability regime. Higher legal regime motivates the auditors

to increase effort in defense against the increased likelihood offu t u r e lit iga t i on (S im u n ic a n d S t e in 1 9 9 6 ) a n d / o r c h a r ge a n

insurance premium to cover possible future litigation costs (Pratt

and Stice 1994). In either case, audit fees should increase if the

divergen ce is r elat ed to th e risk of au dit. We call th is au dit risk

perspective.

On th e other h an d, it is well kn own th at a u dit quality is p riced

in the aud i t marke t (Carce l lo e t a l . 2002 ; Cho i e t a l . 2007b ;

Craswell e t a l . 1995; Francis et a l . 2005). If the divergence is

r e l a t e d t o t h e i n c e n t i v e f o r o w n e r s t o e x p r o p r i a t e m i n o r i t y

The Association between Audit Fees and the Ownership Structure 8 5

1) Pyram idal ownersh ip s t ru cture i s a ch ain o f ownersh ip re la t ions , in which

u su ally control ling sh areh older or h is/ her fam ily mem bers direct ly control a

f i r m , w h i c h i n t u r n c o n t r o l s a n o t h e r f i r m a n d s o f o r t h . V i a p y r a m i d a l

owners hip, controlling sha reholder can control a series of fi rms in th e cha in

of ownership structure with ownership less than 100%. The example of this

structure wil l be discussed later in this art icle. In Korea, according to the

Korea Fair Trade Committee (KFTC) regulations, affiliated companies in the

d es ig n a t ed l a rg e b u s in ess co n g lo mera t es a r e n o t a l l o wed to h av e c ro ss -

sharehold ings wi th o ther af f i l ia ted companies in the same conglomerates .

B u t c i r c u l a r s h a r e h o l d i n g i s n o t b a n n e d . K F T C h a v e d e s i g n a t e d l a r g e

business conglomerates in terms of their asset size. Specific regulat ions areimposed on each of the af f i l ia ted f i rms const i tu t ing the des ignated large

business conglomerates.


4/22

shareholders , i t i s poss ib le tha t the owner asks the audi tor to

prov ide low qua l i ty aud i t s e rv ice in o rde r no t to revea l t rue

fin an cial sta tu s of th e client firm s t o potent ial in vestors .2) We call

th is view low au dit qu ality pers pective.

Us ing 436 f i rm-year observa t ions col lec ted over 2003-2005

p e r i o d f r o m K o r e a n s t o c k m a r k e t a n d t h e d i v e r g e n c e d a t a

provided by Korea Fair Trade Commission (KFTC), we examine

above two predictions. The empirical results reveal that the audit

fee is negatively correlated with the divergence, supporting low

au dit qua lity persp ective.

This paper could contribute to regulators , academics , as wellas practi t ioners and investors in various ways. Firs t , according

t o t h e f i n d i n g s i n t h i s s t u d y , r e g u l a t o r s n e e d t o p a y m o r e

a t t e n t i o n t o t h e f i r m h a v i n g g r e a t e r d i v e r g e n c e i n o r d e r t o

improve the transparency of the firms. Academics also need to

fin d wa y to im prove the a u dit qu ality for th at kind of firm s. Both

accountants and investors also need to pay more at tention when

t h e y a u d i t o r c o n s i d e r i n v e s t m e n t i n t h e f i rm s w i t h g r e a t e r

d i v e rg e n c e . Th e d i v e rg e n c e c o u l d b e p ro x y fo r t h e l e v e l o f

e x p r o p r i a t i o n b y m a j o r s h a r e h o l d e r s a g a i n s t m i n o r i t yshareholders .

This study is composed as follows. Section 2 discusses prior

l i t e r a t u r e a n d p r e s e n t r e s e a r c h h y p o t h e s i s . T h e S e c t i o n 3

e x p l a i n s t h e s a m p l e , f o l l o w e d b y e m p i r i c a l a n a l y s e s i n t h e

Section 4. The fin al section conclud es th e stu dy.


2) In contra st , if the owner needs to persu ade potential investors to invest in h is

firm, h e ha s a n incen tive to signa l the firms qu ality (Fan an d Won g 2005).

The hiring of high-quality auditor is one of the example for the way to signal

t h e q u a l it y . H ow e ve r , F a n a n d W on g s s t u d y u s i n g Ko r e a n d a t a f in d

inconclus ive resu lt on this topic. In add it ion, b ecau se th ere exist au ditor s ize

regulat ion in Korea for the l isted f irms (a cl ient f i rm that i ts asset size is

greater than 2 t r i l l ion Korean Won must h i re a large aud i to r ) dur ing the

sa m ple per iod of Fan an d Wongs s t u dy (1994 -1996) , the a na lyses u s ing

Korean a u ditor choice data are n ot that mu ch m ean ingfu l. When we replicate

Fan an d Wongs s tu dy with our da ta , we a lso fa i l to find a ny s ign i fican tre la t ionsh ip between the level o f ownersh ip d ivergence and large aud i to r

choice.


5/22

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

The Effect of Corporate Ownership Structure

In vestors who h ave a large portion of own ersh ip of a firm h ave

str ong incentives to m axim ize the firm s valu e an d a re a ble to

gain informat ion and moni tor managers as an agent who have

i n c e n t i v e n o t t o a c t i n t h e b e s t i n t e r e s t o f t h e p r i n c i p a l -

s h a r e h o l d e r s , a n d s o c a n h e l p m i t i g a t e o n e o f t h e a g e n c y

p r o b l e m s t h o s e o f c o n f l i c t s o f i n t e r e s t b e t w e e n o u t s i d es h a r e h o ld e r s a n d h i r ed p r o fe s s io n a l m a n a g er s (J e n s e n a n d

Mecling 1976).

However , compl ica ted s t ruc tu res o f modern f i rms where a

controll ing shareholder who possesses almost ful l control over

the firm and other minority shareholder stay outside of the firm

consti tute another suitable but different context of s tudying the

a g e n c y t h e o r y , in w h i ch c o n t r o l l in g s h a r e h o ld e r s h a v e

opportuni ty to expropr ia te weal th f rom other outs ide minor i ty

sh areh olders . Large in vestors m ay represent their own in terests ,which need not coincide with the interests of other investors in

t h e f i r m , o r w i t h t h e i n t e r e s t s o f e m p l o y e e s a n d m a n a g e r s

(Sh leifer a n d Vish iny 19 97 ).

W h e n o w n e r s h i p i s s u f f i c i e n t l y c o n c e n t r a t e d s u c h t h a t a n

owner gains dominant control of a firm, the controlling owner is

a b l e t o d e t e r m i n e t h e p r o f i t d i s t r i b u t i o n a n d u s e f i r m s t o

g e n e r a t e p r i v a t e b e n e f i t s t h a t a r e n o t s h a r e d b y m i n o r i t y

shareholders and may sometimes deprive minori ty shareholders

of the i r r ights to share prof i t s . These agency conf l ic ts can be

exacerbated as the controlling owner leverages control through

stock pyramids or cross-shareholdings while keeping his or her

owner sh ip level low. Th is is ca lled as en tr en ch m en t effect of

own ersh ip (Fan an d Won g 2002 ).

From the more actual s tandpoint of view that is used in the

KFTCs definition of the divergence between voting rights and

c a s h f l o w r i g h t s o f a c o n t ro l l i n g s h a re h o l d e r o f a f i rm , t h e

m e c h a n i s m o f c r e a t i n g t h e d i s p a r i t y b e t w e e n o w n e r s h i p a n d

contro l i s unders tood more eas i ly . A contro l l ing shareholder ,

a l o n e o r w i t h r e l a t e d p a r t i e s , g a i n s d e f a c t o c o n t ro l o f t h ecompa n y. In a t ypical Korean lar ge conglomera te, th ere is a great



6/22

deal of intra-group shareholdings among the affiliated firms. A

con t ro llin g sh a reh o lde r o r h is / h e r fam ily no t m ere ly d irec t ly

owns a fraction of equity but also indirectly has de facto control

from the portion of equity which is held by the related parties,

s u c h a s s e n i o r m a n a g e r s o f t h e f i r m , a f f i l i a t e d n o n - p r o f i t

organ izat ion an d oth er a ffiliated firms (Kim a n d Yi 200 6).

However, the controll ing shareholder does not have only an

i n c e n t i ve t o e xp r o p r i a t e o t h e r i n v e s t o r s w e a l t h , s i n c e t h e

cont rolling sh areh older h as h is / h er cash flow right s of th e firm ,

which m ean s h e/ sh e loses some wealth too. Th e higher th e cash

f low r ights the la rges t shareholder has the h igher i s the cos th e/ sh e bears if h e or sh e were to expropriate , an d th erefore the

m ore aligned is h is/ h er in centive with m in ority sh ar eholders. In

t h i s w a y , t h e i n c e n t i v e o f t h e c o n t r o l l i n g s h a r e h o l d e r s t o

e x p ro p r i a t e o u t s i d e i n v e s t o r s i s m i t i g a t e d b y t h e i r p o s s i b l e

pecun iary loss , which m ean s th e more owners h ip th e con trolling

own er ha s , th e less h e / sh e like ly to expropr ia te .3 ) This is so-

c a l le d t h e i n c e n t i ve e ffe c t o r a li gn m e n t e ffe c t (J e n s e n a n d

Meckil ing 1976; Fan and Wong 2002). However, when control

righ ts increase a nd becom e greater th an cash flow righ ts or whenthe controlling shareholder gain effective control via complicated

ownership s t ruc tures such as pyramidal ownership and cross -

shareholding, the context in which the controll ing shareholder

fin d h im / h e r s e lf c h a n ge s , wh e r e t h e e n t r e n c h m e n t e ffe c t

dom in at es th e alignm ent effect.

In this kind of ownership s tructure, the corporate governance

o f t h e f i rm c a n b e c o m e d e f i c i e n t b e c a u s e o f t h e i n e f f e c t i v e

m o n i t o r i n g b y t h e b o a rd . C o n t ro l l i n g s h a re h o l d e r a n d o f t e n


3) Fan an d Wong (2002; 2005) offer a simple exam ple to explain th e case. When

consider ing buying 30% of F i rm B, an en t repreneur has two op t ions . The

entrepreneur can directly buying 30% of equity of Firm B, which constitutes

a typical horizontal corporate stru ctur e, or al terna tively he/ sh e can ind irect ly

invest in Firm B throu gh Firm A, of which h e/ sh e owns 50 %, which h e/ sh e

controls. Choosing the al ternative way, the entrepreneur can purchase the

shares of the Firm B paying only half cost of direct investment, leaving the

saved purchas ing cos t to be borne by the ou ts ide shareholders . Given the

ownersh ip i l lus t ra ted above, i t cos ts the en t repreneur on ly $15 for every

$100 expropriated from Company B and therefore 85$ of net benefi t from

expropriation falls int o the entr epren eu rs h an ds . Clear ly, if stock pyra m ids

or cross-sharehold ings were used to conso l idate con t ro l , they would a lsoresult in the divergence between ownership and control , which exacerbates

the entren chm ent problem of controll ing owners.


7/22

h is / her fam ily mem bers u su ally hold p owerfu l posit ions on both

th e top ma n agement tea m an d th e board of directors . Controlling

shareholders a re ent renched a t the he lm and have the power to

d e s i g n a t e a n d m o n i t o r c o r p o r a t e m a n a g e r s . T h u s , h a v i n g

effective control of a corporation enables the controlling owner to

m a k e i m p o r t a n t d e c i s i o n s , s u c h a s p r o f i t - s h a r i n g p o l i c y .

Although the minority shareholders are entitled to the cash flow

righ ts in th e proport ion to th eir sh are investm ents , they face th e

u n c e r t a i n t y t h a t t h e e n t r e n c h e d c o n t r o l l in g o wn e r m a y

opportu n istically deprive th em of th eir rights .4)

Hypothesis Development

Wh en th e con t ro lling sh a reh o lde r is en t r ench ed by h is / h e r

voting power and there is a large separat ion of the voting and

cash flow rights , the credibil i ty of accounting is reduced (Fan

and Wong 2002; Francis et al. 2005; Kim and Yi 2005). Outside

investors pay less at tention to the reported accounting numbers ,

because they expec t tha t the con t ro l l ing owner p roduces and

repor ts account ing informat ion out of pr iva te incent ive ra thert h a n a s a t r u e r e fle c t io n o f t h e fir m s e c o n o m ic s t a t u s . In

add it ion, th e firm s r eported ear nings m ay not b e tru sted b y the

outside investors since they perceive the possible manipulation

o f e a r n i n g s f o r o u t r i g h t e x p r o p r i a t i o n b y t h e c o n t r o l l i n g

sha reho lde r . Fur the rmore , ou t s ide inves to rs a re aware o f the

cont rolling owner s incen tive to avoid report ing in form at ion t h at

would invite scrutiny from outside shareholders. As a result, the

loss of c redibi l i ty in repor ted earnings lowers the s tock pr ice

informativeness of the earnings (Fan and Wong 2002). Francis et

a l . ( 2 0 0 5 ) a l s o d o c u m e n t t h a t e a rn i n g s a r e l e s s i n fo rm a t i v e

relative to dividends in U.S. firms with dual-class 5 ) s tocks tha t


4 ) E ve n t h i s k in d o f a g e n c y p r ob l em , w h i c h a r i s e s b e t w e en c o n t r o llin g

sh areh o ld er s an d min o r i t y sh areh o ld er s , i s n o t o f t en i l l eg a l . En t r en ch ed

cont ro l ling sha reh olders oppor tu n is t ic beha vior m ay be often con du cted

within t he legal constra ints .

5 ) Dual -class s tocks are a k ind of mu lt ip le-classes s tocks . When the firm ha s

issued two or more classes of stock with differential voting rights, the voting

structures const i tute mult iple-classes stocks. In a f irm with a single class of

comm on st ock, cash flow rights an d voting r ights are equ al an d a controll ing

o wn e r b e a r s p r o r a t a t h e s h a r e h o ld e r w ea l t h c on s e q u e n c e s o f h i s / h e rdecision. In a dual class structure, one class of common stock typical ly has

more votes per share than the other, while both classes have equal or almost


8/22

sepa ra te votin g rights from cas h flow righ ts.

Expropr ia t ion , i f de tec ted , may induce c lose a t t en t ion and

external intervention by minori ty shareholders , analysts , s tock

exchanges, or regulators. Therefore the desire to keep away from

externa l moni tor ing , potent ia l lega l problems , and consequent

loss of reputation capital likely encourages insiders to veil their

p r i va t e b e n e f i t s a n d n o n - v a lu e - m a x im iz in g d e c is i on s b y

managing repor ted account ing income, espec ia l ly in the weak

legal environment (Haw et al. 2004; Leuz et al. 2003). Because

minor i ty shareholders and other externa l s takeholders a re not

l ikely to have the resources or access to relevant informationenou gh to observe in siders act ions , th ey are, as a r esu lt , u na ble

to detect an d s t raight en ou t ins iders earn in gs m an agement. In

particular, by limiting outflow of information to the public, large

shareholder also allows political rent seekers to evade potential

c o m p e t i t i o n a n d s o c i a l s a n c t i o n s , t h u s r e s u l t i n g i n l e s s

disc losure and low t ransparency in repor ted income (Fan and

Wong 20 02 ).

Th ese cha ra cteristics related to th e own ersh ip divergen ce cou ld

b e i n f l u e n c e t h e l e v e l o f a u d i t f e e s . O n t h e o n e h a n d , t h edivergence could be positively associated with audit fees if we

accept th e au dit risk p ersp ective. Th e au ditor is p aid a fee to

a t t e s t t o t h e a s s e r t i on s c on t a i n e d i n t h e c lie n t s f in a n c ia l

s ta temen ts , an d presu m ably th e fee reflects the work th e au ditor

must perform to bear the audit r isk (Choi et a l . 2007a; Craswell

et a l . 1995 ; Sim mu nic 1980). Seeth ara ma n et a l . (2002 ) fin d th at

audit fees reflect risk differences across countries with different

level of legal liability regime. Higher legal regime motivates the

a u d i t o r s t o i n c r e a s e e f fo r t i n d e f e n s e a g a i n s t t h e i n c r e a s e d

likelih ood of fu tu re l it igat ion (Sim u n ic an d Stein 199 6) an d/ or

charge an insurance premium to cover possible future litigation

cos ts (Pra t t and St ice 1994) . In e i ther case , audi t fees should

inc rease i f the d ive rgence i s re la ted to the r i sk o f aud i t . As

e x p la i n e d b e fo r e , b e c a u s e t h e d i ve r g en t f i r m s h a v e le s s

transparency and could dis tort f inancial report ing, the auditor

needs to bear more audit r isk. Thus, audit fee could increase as

t h e d i v e r g e n c e i n c r e a s e s , c o n s i s t e n t w i t h t h e a u d i t r i s k


equal cash f low rights per share(Francis et al . 2005; Vil lalonga and Amit

2006).


9/22

perspective.

On th e other h an d, it is well kn own th at a u dit quality is p riced

in the aud i t marke t (Carce l lo e t a l . 2002 ; Cho i e t a l . 2007b ;

Craswell et al. 1995; Francis et al. 2005). Consistent with this

view, the extan t a u dit pricin g models, developed first by Simu n ic

(1980) and further extended by Choi et al. (2007a), predict that

a u d i t f e e s , w h i c h a r e e q u a l t o a u d i t c o s t s a t a c o m p e t i t i v e

equilibrium, are a function of (1) client characteristics such as

c l ient s ize , c l ient complexi ty , and c l ient -spec i f ic r i sk and (2)

a u d i t o r c h a ra c t e r i s t i c s s u c h a s a u d i t f i rm s i z e a n d i n d u s t ry

e x p e r t i s e a t t h e n a t i o n a l l e v e l . F o r e x a m p l e , t h e r e i s a m p l eevidence tha t h igh-qual i ty audi tors enjoy audi t fee premiums

(Simunic 1980). In addit ion, recent s tudies by Ferguson et a l .

(2003) and Francis e t a l . (2005) document tha t audi tors wi th

c i ty-based indus t ry leadership are able to charge h igher audi t

fees to th eir client s b ecau se city-specific in du str y expert au ditors

can provide h igh-qu ality au dit service.

Th u s, if th e divergen ce is related to th e incent ive for owners to

expropriate minority shareholders, it is possible that the owner

asks the auditor to provide low quality audit service in order notto revea l t rue f inancia l s ta tus of the c l ient f i rms to potent ia l

investors , followin g low a u dit qu ality pers pective.

In s u m m a ry , b e c a u s e a u d i t r i s k p e r s p e c t i v e a n d l o w a u d i t

quality perspective provide different predictions with respect to

t h e a s s o c i a t i o n b e t w e e n a u d i t f e e s a n d t h e d i v e r g e n c e , w e

provide th e h ypothesis in th e n u ll form as follows:

H: T h e r e i s n o a s s o c i a t i o n b e t w e e n a u d i t f e e s a n d t h e

owners h ip d ivergence.

I f we re jec t the nu l l hypo thes i s a s p resen ted in the above

hypothesis H, the results would support e i ther audit r isk or low

audit quality perspective. If we fail to reject the null hypothesis,

i t is possible that there exis t no relat ionship at a l l among the

audit fee and the divergence or the audit risk perspective cancel

low au dit qu ality persp ective out .



10/22

METHODOLOGY

Sample and Data

We estimate the association between audit fees and deviation

of control rights over cas h flow righ ts u sing da ta from 43 6 a u dits

( f i r m - y e a r o b s e r v a t i o n s ) p e r f o r m e d f o r t h e l i s t e d l a r g e

conglomera te- affiliat ed firm s in Korea d u ring 3 years from 200 3

to 2005. KFTC compiles ownership and contro l r ights da ta of

l a r g e c o n g l o m e r a t e - a f f i l i a t e d c o m p a n i e s , c o m p u t e s t h edivergence between them and posts the data in i ts homepage.6)

KFTC data sets in clu de th e portion of sh ar es h eld by a cont rollin g

s h a r e h o ld e r a n d b y h i s / h e r r e la t e d p a r t ie s . Re la t e d p a r t ie s

inc lude re la t ives , senior managers of the f i rm, a ff i l ia ted non-

profit organizations, and other affiliated firms. Only listed firms

are se lec ted as sample f i rms s ince re l iable f inancia l da ta for

o t h e r k e y v a r i a b l e s a r e n o t o b t a i n a b l e e v e n t h o u g h K F T C

datase ts inc ludes both of the l i s ted and non- l is ted f i rms . For

audit fees and audit hours, we collected the data from the filingsposted in the DART system.7 ) For control variables other than

audit fees and audit hours, we obtained data from KIS-VALUEII

database. For a simple recognition of the status of control and

o w n e r s h i p s t r u c t u r e s o f t h e s a m p l e , t a b l e 1 p r e s e n t s b a s i c

s ta t i s t ics of the cash f low r ights and the vot ing r ights of the

controlling shareholders and the divergences between these two.

Table 1 shows that, for the full sample, the average cash flow

righ t of a con trolling sh areh older a n d h is / h er fam ily mem bers is

1 3 .1 9 % w h i c h i s 3 0 .1 7 % l o w e r t h a n 4 3 .3 6 % o f v o t i n g r i g h t

h e/ sh e ha s . The divergence is su bsta n tial , ran ging from 0 to 79.

79%. The s tandard devia t ion (SD) is a lso very la rge (20.58) ,

su ggesting th at t h ere is s u bs ta n tial var iab ility for th e divergen ce.

In summary, this can be translated as a controll ing shareholder

an d h is / h er fam ily memb er increas e an d gain de facto con trol via

the ownership of the re la ted par t ies . This resul t i s cons is tent


6) www.ftc .go .kr .

7 ) D AR T (D a t a An a l ys i s , R e t r ie v a l a n d Tr a n s fe r S y s t e m ) i s a n e l e c t r o n i c

disclosure system operated by FSS(Financial Supervisory Service of Korea)t h a t a l l o w s c o m p a n i e s t o s u b m i t d i s c l o s u r e s o n l i n e , w h e r e i t b e c o m e s

im mediately available to investors an d other u sers.


11/22

with th e fin ding by Claes sen s et al. (20 00).

Model

To test hypothesis H, we posit the following regression models:

FEE = a 0 + a 1 DVC + a 2 SIZE + a 3 BIG4 + a 4 ROA + a 5 LEV + a 6INVREC + a 7 IS S UE + a 8 YEAR2003 + a 9 YEAR2004 + e

(1)

where, a 0 to a 9 are regress ional parameters , e is a normally

dis t r ibuted error te rm, and the o ther var iables a re def ined as

follows.

FEE = na tu ra l log of au dit fees in th ousan d Korean Won;

DVC = d i ve rg en c e , in p e r c e n t a g e va l u e , b e t we e n c a s h f lo w

righ ts an d votin g rights of a controllin g sh ar eholder of a

firm;

SIZE= na tu ral log of year-end m ark et value of com mon equity

in thous an d Korean won;

BIG4 = 1 if th e au ditor of th e firm is on e of in tern ationa l Big 4-

affiliat ed au ditors an d 0 oth erwise;

ROA = retu rn on a s se t s of a firm;

LEV = long-term liab ilities divided by total ass ets of a firm ;


Table 1 . Basic Statis tics of Ownership St ruct ures (%)

N Mea n Median SD Min . Ma x.

Ca sh flow r igh t 436 13 .190 4 .015 17 .179 0 75 .040

Votin g r igh t 436 43 .356 41 .290 17 .411 0 .600 95 .170

Divergen ce 436 30 .165 30 .945 20 .580 0 79 .790

V a r i a b l e d e f i n i t i o n : C a s h f l o w r i g h t = a s u m o f d i r e c t o w n e r s h i p

sta kes(%) h eld by a contr ollin g sh ar eholder of a firm an d h is/ h er fam ily

m e m b e r s o w n e r s h i p o f t h e fi r m . Vo t in g r ig h t = a s u m o f d i r e c t

owners h ip h eld by a con trollin g sh areh older of a firm , own ersh ip h eld by

fam ily members an d th e own ersh ip h eld b y senior m an agers of the f irm ,affi l ia ted non-profi t organizat ion and affi l ia ted f i rms. Divergence = a

d i f fe rence be tween Cash f l ow r i gh t and Vot ing r i gh t , computed by

subtracting Cash flow right(%) from Voting right(%) of the controlling

sh ar eholder of th e firm .


12/22

INVREC= su m of in vent ories a n d a ccoun t r eceivab les d ivided

by total as sets of a firm ;

ISS UE = 1 if a firm h a s is s u e d l o n g -t e rm d e b t s o r e q u it i es

with in th ree years a n d 0 otherwise;

YEAR2003 = 1 when a firm year is 200 3 a nd 0 otherwise;

YEAR2004 = 1 when a firm year is 200 4 a nd 0 otherwise.

Eq u a t i o n (1 ) u s e FE E a s a d e p e n d e n t v a r i a b l e , w h i c h i s a

natural logarithm of yearly audit fees paid by a client, as posted

in the DART system. Equation (1) includes a test variable, DVC

which is def ined as the d ivergence be tween vot ing r ights andcash flow rights of a controlling shareholder of a firm. If the audit

r isk perspective dominates , the coefficient on DVC (i.e., a 1) is

expected to have a positive relation with FEE (i.e., a 1 > 0). In

c o n t r a s t , i f l o w a u d i t q u a l i t y p e r s p e c t i v e d o m i n a t e s , t h e

coefficient on DVC (i.e., a 1) is exp ected t o ha ve a n egative relation

with FEE (i.e., a 1 < 0).

The control variables used in equation (1) are chosen based on

the prior studies of Simunic (1980) and Choi et al. (2007a). SIZE

represents firm s ize which is m easu red by th e na tu ral logari thmof th e m ar ket value of comm on s tock. Genera lly, lar ge firm s h ave

greater a ssets to be au dited by externa l au ditors , incu rring more

audit efforts and thus increasing audit fees (Simunic 1980). So,

SIZE is expected to be positively related to FEE (i.e., a 2 > 0). BIG4

cap t u res a u d i to r s s ize e ffec t on au d i t fees . B ig b ran d n am e

auditors are well documented to earn a fee premium over non-

Big audit firms (Craswell et al. 1995; Francis 1984). So BIG4 is

expected to have a positive relation to FEE. ROA a n d LEV is the

proxies for a client-specific audit risk to be borne by auditors.

ROA is introduced because more profi table companies are less

l ike ly to end up in bankrup tcy and so i s expec ted to have a

negative association with FEE. LEV captu res r isk a ssociated with

h ighe r l eve l o f deb t and thus i s expec ted to have a pos i t ive

relation with FEE. To clear the possible effect of outliers, this

variable is f irs t winsorized at the 10 s t a n d t h e 9 0 t h percenti le

valu es. We also includ e th e ra tio of in vent ory an d r eceivab les ou t

of total assets (INVREC) as a proxy for audit complexity, which

in creases a u dit fees . New debt or equ ity issu an ce du mm y (ISS UE)

captures demands for quality audit since a firm is likely to havean incentive to produce quality reporting so as to invite outside



13/22

investors when the f irm is in needs of new external f inancing.

Quali ty report ing requires quali ty audit , which increases audit

fees . ISSUE a l so measures l i t iga t ion r i sks f rom bankrup tcy ,

w h i c h a r e l i k e l y t o b e g r e a t e r f o r f i r m s w h o h a v e r e c e n t l y

fina n ced externa l fu nd s b y issu in g new equ ity or bon ds in capital

markets . In e i ther case , ISSUE is expected to have a pos i t ive

relat ion with a u dit fees.

EMPIRICAL RESULTS

Descriptive Statistics

Tab le 2 pres ent s descriptive sta tistics for a ll var iab les inclu ded

in th e regress ion m odels. The m ean of n at u ra lly logged a u dit fees

(FEE) i s 11 .74. Al though i t i s not repor ted in the table 2 , the

ari thmetic mean of raw audit fees (not logged value) is 184.6

million Korean Won. Sample firms have, on average, 30.17% of

divergence (DVC) between cash flow rights and voting rights of


Table 2 . Sum m ary St atistic s o f Regressio n Variables

Varia b le Mean Median Std . Dev. Min . Ma x.

FEE 11 .744 11 .608 0 .834 9 .546 14 .731

DVC 30 .165 30 .945 20 .580 0 .000 79 .790

SIZE 19 .616 19 .678 1 .754 15 .303 25 .298

BIG4 0 .876 1 .000 0 .329 0 .000 1 .000

ROA 5 .327 5.245 7 .487 -63 .940 34 .670

LEV 37 .244 26 .600 32 .831 3 .250 105 .240

INVREC 0 .210 0.192 0 .128 0 .000 0 .713IS S UE 0 .486 0.000 0 .500 0 .000 1 .00

Var iable d efinition : FEE = a n atu ral log of au di t fees in thou san d Korean

Won. DVC = divergence, in percentage value, between cash flow rights

and voting rights of a controlling shareholder. SIZE = a natural log of

year-end ma rket valu e of comm on equ ity in thou san d Korean won . BIG4

= 1 if the auditor of the firm is one of international Big 4(5, 6) affiliated

audi tors and 0 otherwise . ROA = a return on assets of a f i rm. LEV =

long-term liabilities divided by total assets of a firm. INVREC = in ven tory

and an accounts receivable divided by total assets of a firm. ISS UE = 1 if

a f i rm has issued long-term debts or equi t ies within three years and 0

otherwise.


14/22

controll ing shareholders . The mean of natural ly logged market

value of common equity of firms (SIZE) is 19.62. If computed as

raw (not logged) market value, the mean of raw market value of

common equi ty of sample f i rms is 1 .691 bi l l ion Korean Won.

B e c a u s e t h e s a m p l e f i r m s a r e t h e f i r m s b e l o n g t o b u s i n e s s

conglomera tes in Korea, th ey are on average very lar ge firm s. On

average , 87 .6% of aud i t s a re conduc ted by one o f the B ig 4

audi tors (BIG4 ). Sample firms have, on average, 5.33% of ROA

and 37.24% of leverage ra t io (LE V) . Account rece ivables and

inventories comprise, on average, 21% of total assets (INVREC).

On average, 49% of firms in the sample have issued long-termdebt or equ ities with in th ree prior years (ISS UE).

Correlations

Ta b l e 3 r e p o r t s t h e P e a r s o n c o r r e l a t i o n c o e f f i c i e n t f o r a l l

variables that are included in the equation (1) and respective p

values.8) As shown in the table 3, the divergence between voting

r i g h t s a n d c a s h f l o w r i g h t s o f a c o n t r o l l i n g s h a r e h o l d e r i s

negatively correlated to audit fees. The correlation coefficient is-0.3334 between DVC a n d FEE an d is s ignifican t at less th an 1%

level . This result is apparently inconsis tent with the audit r isk

pers pective bu t cons isten t with low au dit qu ality perspective.

In addition, the strong positive correlations between FEE a n d

SIZE and between FEE a n d BIG4 support the previous l i terature

that large firms and firms audited by Big 4 are likely to charge

higher fees . In addit ion, posit ive correlat ion between FEE a n d

LEVE support the predic t ion tha t r i sky f i rms pay higher audi t

fees . However, the posit ive correlat ion between FEE a n d ROA

does not support the prediction. In addition, negative correlation

between FEE a n d INVREC also do not support the f indings in

prior s tudies . This could be due to fai lure to control for other

correlated variables. Thus, we are going to perform multivariate

regression an alyses later . Th ere exists str ong n egative correlation

between DVC a n d SIZE too (-0.3 15 4).

Among contro l var iables , h ighes t corre la t ion exis t be tween

S I Z E a n d R O A ( 0 . 3 5 7 0 ) a n d b e t w e e n S I Z E a n d IN V R E C

(-0.3099). However, given that none of the correlat ions among


8) Becau se th e resu l t s u s ing Spearm an correla t ion are qua lita t ively s imi lar , we

do not report th em separ ately for the s imp licity purp ose.


15/22

c o n t r o l v a r i a b l e s a r e g r e a t e r t h a n 0 . 4 , i t i s n o t l i k e l y t h e

c o r r e la t i o n s c a u s e m u l t i co lin e a r i y p r o b l e m d u r i n g t h e

multivariate regression analyses.

Regression Analyses

Next, we perform regression an alyses with equ ation (1) to see if

the d ivergence inf luence audi t fees even af te r contro l l ing for


Table 3. Pearson Correlations (p-values) for Variables

FEE DVC SIZE BIG4 ROA LEV INVREC ISSUE

FEE 1.0000

-0.3334DVC 1.0000

(


16/22

other possibly correlated variables . The results are reported in

table 4.9 )

We repeat regressions twice with and without DVCvariable. The column (1) of table 4 reports the results without

DVCan d th e colu mn (2) reports th ose with DVC.

F i rs t of a l l , the resul ts shown in column (1) revea l tha t the

explanatory power of the model is very high (0.752) as reported

i n t h e b o t t o m r o w o f t h e t a b l e , s u g g e s t i n g t h a t t h e m o d e l

explains the substantial portion of audit fees. As also reported in

the table , a l l the control variables are s ignificantly correlated


9) For a ll the res u l t s repor ted in Table 4 , we u se Whi tes (1980 ) meth od to

correct for the heteroskedasticity. In addition, we check VIF scores to see ifthe mu lt icolinea ri ty cau se a ny problem bu t th ere were no VIF valu es greater

th an 1 0 .

Table 4 . Result of Regres sion Analyse s

VariablesExpected

(1) Redu ced m odel (2 ) Fu ll m odel

Sign Coefficien t t -va lu e Coefficien t t -va lu e

DVC ? -0.0016 -3 .53***

SIZE + 0.4154 30 .27*** 0 .3989 27 .26***

BIG4 + 0.0987 3 .95*** 0 .1127 4 .44***

ROA - -0 .0088 -5 .63*** -0 .0089 -5 .78***

LEV + 0.0007 4 .89*** 0 .0007 5 .06***

INVREC + 0.2316 3 .24*** 0 .2144 2 .95***

IS S UE + -0 .0177 -1 .04 -0 .0049 -0 .28Con s ta n t ? 1 .4113 12 .23*** 1 .5865 12 .64***

Adj. R2 0 .752 0 .758

Var iable d efinition : FEE = a n atu ral log of au di t fees in thou san d Korean

Won. DVC = divergence, in percentage value, between cash flow rights

and voting rights of a controlling shareholder. SIZE = a natural log of

year-end ma rket valu e of comm on equ ity in thou san d Korean won . BIG4

= 1 if the auditor of the firm is one of international Big 4(5,6) affiliated

audi tors and 0 otherwise . ROA = a return on assets of a f i rm. LEV =

long-term liabilities divided by total assets of a firm. INVREC = in ven tory

and an accounts receivable divided by total assets of a firm. IS S UE = 1 if

a f i rm has issued long-term debts or equi t ies within three years and 0

otherwise.

The model used in the regression: FEE = a 0 + a 1 DVC + a 2 SIZE + a 3BIG4 + a 4 ROA + a 5 LEV + a 6 INVREC + a 7 IS S UE + a 8 YEAR2003 + a 9YEAR2004 + e

***: sign ifican t a t t h e 1 % level.


17/22

w i t h a u d i t f e e s . I n a d d i t i o n , t h e c o e f f i c i e n t s o n t h e c o n t ro l

va r ia b le s a r e a ll in t h e e x p e c t e d d i r e c t io n s , e x c ep t IS S UE

variable. For example, the coefficients on SIZE is 0.4154 which is

significan t a t th e 1% level (t = 30.27).

The results using the full model of equation (1) are reported in

the column (2) of table 4. The coefficients on DVC i s -0 .0016

which is significant at the 1% level (t = -3.53), support ing the

pred ic t ion o f low aud i t qua l i ty pe rspec t ive . The exp lana to ry

power s l ightly increases from 0.752 in column (1) to 0.758 in

column (2). In addition, there are no qualitative differences for

other control variables at all between column (1) and (2). Theseresu lts clearly su ggest th at th e low au dit qu ality effect domin ates

the audit pricing mechanism with respect to the divergence. I t

implies that the firms with greater divergence do not want high-

qua l i ty aud i t s e rv ice , thus a sk aud i to rs to pe r fo rm on ly low-

qu ality au dit service an d p ay au dit fees accordingly.

Controls for the Endogeneity

I t may be possible that the documented results up to table 4could be endogenuous firm characteris t ics that determines both

t h e c o r p o r a t e g o v e r n a n c e m e c h a n i s m a n d a u d i t f e e s . F o r

example , a sma l l - s i zed c l i en t f i rm may have weak corpora te

governance mechanism and also prefer low quality audit service.

In this case, not the corporate governance mechanism but also

the f irm s ize is the main driver of the f indings. To check this

poss ib i l i ty , we adopt 2-s tage regress ion method by us ing the

followin g first st a ge probit r egress ion m odel.

GOODCG = 4.71 79 + 0.26 64 SIZE 1.9 20 8 ROA 0.6 17 8

ISS UE + 0.217 6 LEV + e (2)

In equation (2), a 0 to a 4 are regress ional parameters , e is a

normally dis tr ibuted error term, and GOODCG is th e measu re of

good corporate governance. The variable has a value of 1 if the

DVC is below median value and 0 otherwise. Because there exist

no prior s tudies that examine the determinants of the ownership

d ive rgence , we choose th ree de te rminan t s o f GOODCG (ROA ,

IS S UE, and LEV) through trial and errors. First, we select everycon t ro l employed in equa t ion (1 ) and seve ra l o the r pos s ib le



18/22

v a r i a b l e s a n d ru n t h e p ro b i t r e g re s s i o n . A m o n g t h e c o n t ro l

variables employed, we left all the variables that have significant

coefficient s an d drop th e ins ignifican t variables. As a resu lt, on ly

four variables are left finally.10 ) The explanatory power (pseudo

R2) o f the mode l i s 0 .1128 which i s no t tha t h igh . Th i s low

explanatory power suggests that there is no s trong reason for a

compa n y to ha ve low or h igh owners h ip d ivergen ce.

After adding the inverse Mills ratio calculated using equation

(2) into equation (1), we re-perform all the logit analyses reported

in this s tudy. However, the second s tage regression results do

not change qualitatively at all . For example, if we perform thesame analyses as those repor ted in column (2) of table 4 , the

coefficient on the DVC is -0.004 1 wh ich is sign ifican t a t 1 % level

(t = -2.80; p = 0.006). The coefficient on inverse Mills ratio is

1.1896 which is significant at 5% level (t = 2.37; p = 0.019). In

s u m m a r y , t h e s e r e s u l t s s u g g e s t t h a t e n d o g e n e i t y d o e s n o t

influence our findings in this study.

CONCLUSION

Owners h ip an d control s tru ctur es of m an y pu blic com pan ies in

East Asia and Western Europe are well characterized by family-

control, close relation of managers with the controlling owners,

an d t h e cont rollin g owner s votin g right s exceeding cas h flow

rights . This s tudy examines the associat ion between ownership

s t ruc ture and audi t fess . Especia l ly , th is s tudy focuses on the

ownership s tructure measured by the divergence of control and

ownership. If an owner owns a company through the pyramidal

s tructure, i t is possible that the voting rights of the owner are

g r e a t e r t h a n t h e c a s h f l o w r i g h t s o f t h e s a m e o w n e r . T h e

differen ce could in fluen ce th e fi rms au di t - re la t ed p olicy an d

au ditors beh avior. Th is stu dy exam in es th is iss u e.

On the one hand, the divergence could be positively associated

1 0 0 Seoul Journal of Business

1 0 ) M os t o f t h e d r o p p e d v a r i a b l e s in t h i s p r o c e s s d o n o t h a v e s i gn i fi c a n t

difference between the two groups in the univariate tests. For example, LOSS

variable, which have a value of 1 if the firm report loss in current year and 0

o therwise , i s no t s ign i f ican t d i f feren t between the two (t = -1 .37) in theunivar ia te tes t and drop dur ing the p rob i t regress ion process because the

coefficient of the variable is not significant.


19/22

w i t h a u d i t f e e s . T h e a u d i t o r i s p a i d a f e e t o a t t e s t t o t h e

as se r t ions con ta in ed in th e c lien t s fina n c ia l s t a t emen ts , a nd

presu m ably th e fee reflects th e work th e au ditor m u st p erform to

bear the audit risk. Audit fees should increase if the divergence

is related to th e risk of au dit. On th e other h an d, it is well kn own

that audit quality is priced in the audit market. If the divergence

is re la ted to the incent ive for owners to expropr ia te minor i ty

shareholders , i t i s poss ib le tha t the owner asks the audi tor to

prov ide low qua l i ty aud i t s e rv ice in o rde r no t to revea l t rue

fin an cial sta tu s of th e client firm s t o potent ial in vestors .

Us ing 436 f i rm-year observa t ions col lec ted over 2003-2005p e r i o d f r o m K o r e a n s t o c k m a r k e t a n d t h e d i v e r g e n c e d a t a

p ro v i d e d b y K F TC , w e e x a m i n e a b o v e t w o p re d i c t i o n s . Th e

emp irical resu lts reveal th at th e au dit fee is n egatively correlated

with the divergence. This finding is somehow inconsistent with

th e fin ding in Fan an d Won gs (200 5) stu dy with other cou n tries

d a t a t h a t h a v e p o s i t i v e a s s o c i a t i o n b e t w e e n q u a l i t y a u d i t o r

choice and the ownership divergence. The difference could be

due to different investor protection and legal system in different

coun t r i e s . Because the l eve l o f inves to r p ro tec t ion i s low inKorea, it is possible that client firms in Korea do care less about

audit r isk but care more about saving audit fee compared with

client firms in the strong investor protection and legal system.

Under the lack of legal risk, auditors also have less incentive to

provide h igh-qu ality au dit ser vice to a void in vestor lawsu its.

The findings in this s tudy are very important because i t can

cont ribu te to regu lators , a cademics , as well as p racti t ioners a n d

in vestors in var iou s ways.

REFERENCES

Car cello, J . V., D. R. Herma n son , T. L. Neal, an d R. A. Riley, J r. (20 02 ),

Board Characteris t ics and Audit Fees, Contemporary Accounting

Res earch , 19(3), 367 -384 .

Ch oi, J .-H., J .-B. Kim, X. Liu, a n d D. Simu n ic (20 07 a), Au dit Pricin g,

Legal Liabili ty Regimes, and Big 4 Premiums: Theory and Cross-

c o u n t r y E v i d e n c e , C o n t e m p o r a r y A c c o u n t i n g R e s e a r c h

(forthcoming).

________, A. Q iu , a n d Y. Zan g (20 0 7 b) Au d itor Loca lity, Au d it Qu a lity

a n d A u d i t P r i c i n g , W o r k i n g P a p e r , S i n g a p o r e M a n a g e m e n t

The Association between Audit Fees and the Ownership Structure 1 0 1


20/22

University.

Claessens, S., S. Djankov, and L. H. P. Lang (2000), The Separation of

Ownersh ip and Cont ro l i n Eas t As i an Corpora t i ons , J ou rn a l of

Financial Economics , 58 , 81-112.

Cras well, A., J . R. Fran cis, a n d S . Taylor (19 95 ), Au ditor Bran d Nam e

Repu tat ion s an d Ind u stry Sp ecial izat ion, Jou rn a l of Accou n ting and

Econom ics , 20(3), 297 -322 .

Faccio, M. and L. H. Lang (2002), The Ultimate Ownership of Western

European Corporat ions, Jou rna l of Fin ancia l Econom ics , 65 , 365-

395 .

Fan , P. H., an d T. J . Won g (200 2), Corporate Own ersh ip Stru ctur e an d

the Informativeness of Accounting Earnings in East Asia, Jou rn a lof Accounting a nd Economics , 33 , 401-425.

Fan, P. H., and T. J . Wong (2005), Do External Audi tors Perform a

Corporate Governance Role in Emerging Markets? Evidence from

Eas t Asia,Jou rn a l of Accou n ting Res earch , 43 (1), 35 -72.

Fergus on, A. , J . R. Fran c is an d D. J . S tokes (200 3), Th e Effec t s of

Firm-wide and Office-level Industry Expertise on Audit Pricing, Th e

Accou n ting Review , 78(2), 429 -449 .

Francis, J. , K. Schipper, and L.Vincent (2005), Earnings and Dividend

Informativeness when Cash Flow Rights Are Separated from Voting

Rights,Jou rn a l of accou n ting and econom ics , 39 , 329-360.H a w , I . M . , B . H u , L . S . H w a n g , a n d W . W u ( 2 0 0 4 ) , U l t i m a t e

O w n e r s h i p , I n c o m e M a n a g e m e n t , a n d L e g a l a n d E x t r a - l e g a l

Inst i tut ions,Jou rna l of Accou n ting Res earch , 42(2), 423 -462 .

J e n s e n , M . c. , a n d W . H . Me c k l in g (1 9 7 6 ), Th e o r y o f t h e F ir m :

Manage r i a l Behav ior , Agency Cos t s and Ownersh ip S t ruc tu re ,

Jou rn a l of Fin ancia l E conom ics , 3 , 305-360.

Kim, J. B. and C. H. Yi (2006), Ownership Structure, Business Group

Affiliation, Listing St atu s an d E arn in gs Man agemen t: Eviden ce from

Korea, Contemporary Accounting Research , 23(2), 427 -464 .

La Porta , R. , F. Lopez-de-Si lanes, and A. Shleifer (1999), CorporateOwnership Around the World,Jou rna l of Fin ance , 54 , 471-518.

Leuz, C., D. Nanda and P. Wysocki (2003), Earnings Management and

I n v e s t o r P r o t e c t i o n : A n I n t e r n a t i o n a l C o m p a r i s o n , J ou rn a l of

Financial Economics , 69 , 505-527.

Pratt , J . an d J . D. Stice (19 94 ), Th e Effect of Client Ch ara cteristics on

Auditor Litigation Risk Adjustments, Required Audit Evidence, and

Recommended Audit Fees, The Accounting Review , 69 , 639-656.

Seetharaman, A., F. A. Gul, and S. G.Lynn (2002), Litigation Risk and

Au dit Fees: Eviden ce from U.K. Firms Cross -listed on U.S.Mark ets,

Jou rn a l of accou n ting and econom ics , 33 , 91-115.Sheleifer, A. and R. Vishny (1997), A Survey of Corporate Governance,

1 0 2 Seoul Journal of Business


21/22

Jou rn a l of Fin ance , 52 , 737-783.

Simunic , D. A. (1980) , The Pr ic ing of Audi t Services : Theory and

Evidence,Jou rna l of Accou n ting Res earch , 18(1), 161 -190 .

________ a n d M. T. St ein (19 96 ), The Im pa ct of Litiga tion Risk on Au dit

Pricing: A Review of the Economics and the Evidence, Aud itin g: A

Jou rn a l of Pract ice and Th eory , 15 , 119-134.

Villalonga, B. and R. Amit (2006), How do Family Ownership, Control

a n d M a n a g e m e n t A f f e c t F i r m V a l u e ? J ou rn a l o f Fin a n c ia l

Econom ics , 80 , 385-417.

White , H. (1980), A Heteroskedast ic i ty-consistent Covariance Matrix

Estimator and a Direct Test for Heteroskedasticity, Econom etrica ,

48(4), 817-838.

The Association between Audit Fees and the Ownership Structure 1 0 3


22/22

12 Jong-Hag Choietc2jae

Documents

Transcript of 12 Jong-Hag Choietc2jae