Multiple Large Shareholders and Audit Pricing: Evidence from Chinese Family Companies

Niu Ruiyang; Chen Lin; Li Ruitao; Xie Guanghua

doi:doi:10.16538/j.cnki.fem.20210315.202

Summary

Multiple large shareholders （MLS） are a general ownership phenomenon in the global capital market. In the traditional context of corporate governance, non-controlling large shareholders are the key guardians of the interests of small and medium shareholders. They can not only supervise the controlling shareholders, but also enhance the value of companies. However, in recent years, the events that MLS of family companies unite to infringe the interests of small and medium investors are increasing. Therefore, in the special case of the typical nepotism of MLS in family companies, it is worth further testing whether the supervision and balance function of large shareholders still exists. Audit pricing has always been the focus of the audit theory and practice. The principal-agent problem between internal large shareholders and external investors has a crucial impact on audit pricing. Audit pricing also provides a good external perspective for us to explore whether there is any collusion motivation between large shareholders of family companies or not. Under the special circumstances of typical nepotism among the major shareholders of family companies, this paper examines whether the supervision and balance function of MLS still exists from the perspective of audit pricing. Based on the data of Shanghai and Shenzhen A-share family listed companies from 2007 to 2017, we find that the existence of MLS stimulates a significant increase in audit fees. This phenomenon exists only when the controlling shareholders of family companies pledge their shares and the market is undeveloped. Moreover, the equity pledge will significantly enhance the promotion effect of MLS on audit fees in undeveloped areas. The channel effect test shows that MLS stimulates the stock price through earnings management, stock dividends and strategic stock change. These three ways can lead to the increase of audit risk and auditing institutions always choose to charge a premium to compensate the risk. This paper scrutinizes the possible collusion motivation of MLS in family companies from the perspective of audit pricing, which provides a new “puzzle” for the research of economic consequences of MLS. It also provides some empirical evidence for understanding auditors’ dereliction of duty regarding the encroachment on the interests of small and medium shareholders in the capital market. And through the research of whether MLS in family companies contribute to higher audit fees, this paper also provides a supplement for the risk compensation theory of the audit pricing theory. The policy suggestions of this paper are mainly reflected as follows: （1） As for the collusion among MLS in family companies, investors should strengthen the relevant protection consciousness. （2） In China’s capital market, there are so many accidents that large shareholders of family companies empty the wealth of small shareholders. The external independent auditor is indeed responsible for dereliction of duty. The research has certain enlightenment for the regulatory authorities to regulate the professional ethics of auditing institutions and protect the interests of external investors.