Founding family and auditor choice: Evidence from Taiwan
Durham University Business School, Durham
University, Mill Hill Lane, Durham DH1 3LB,
CTBC Business School, No. 600, Sec. 3,
Taijiang Blvd., Annan District, Tainan City 709,
National Central University, No. 300,
Zhongda Rd., Zhongli District, Taoyuan City
Che‐Hung Lin, CTBC Business School, No.600,
Sec. 3, Taijiang Blvd., Annan District, Tainan
City 709, Taiwan, R.O.C.
From an agency perspective, we investigate whether family
ownership and control configurations are systematically associated with a firm's choice of auditor.
Our analysis focuses on three different characteristics of family ownership and control: family
ownership (cash flow rights), disparity between cash flow and voting rights held by family owners
(cash–vote divergence), and the family identities of CEOs.
Our findings suggest that different family ownership and con-
trol configurations lead to different agency effects. The alignment effect prevails in family firms
with greater family ownership, founder CEOs, and professional CEOs, whereas the entrenchment
effect prevails when there is greater cash–vote divergence. Despite the presence of two distinct
types of agency effects, regardless of differences in family ownership and control configurations,
none of these firms is inclined to appoint higher‐quality auditors.
This study advances our understanding of the varied
agency effects arising from family ownership, cash–vote divergence, and the family identities of
CEOs, as well as the impact of family ownership and control features on auditor choice. Our
empirical evidence provides a unique insight, showing that higher‐quality auditors do not tend
to be appointed in firms where family alignment with outside investors is relatively strong, as this
lowers demand for such auditors. In addition, although family entrenchment may create greater
outside investor demand for higher‐quality auditors, such demand is difficult to realize.
Auditors are an important external governance mecha-
nism. This study offers insights for policymakers, family owners, auditors, and other capital mar-
ket participants, with regard to the varied effects of different family ownership and control
features on auditor choice.
Corporate Governance, Family Firm Governance, Auditor Choice, Ownership Structure, CEO
Family firms are a distinct type of organizational structure. Unlike non‐
family firms, they are often characterized by concentrated family own-
ership and greater involvement by family members in the management.
However, it should be noted that family firms are not a homogeneous
group. Differences in family ownership and control features create
varied incentives for family owners and consequently influence the
agency environment within the firm (e.g., Anderson & Reeb, 2003;
Chen, Cheng, & Dai, 2013b; Wang, 2006). This in turn may influence
auditor choice, which is an important company decision relating to
financial reporting. It has been suggested that monitoring by higher‐
quality auditors can reduce insiders' incentives and ability to render
financial statements less informative, thereby alleviating the problem
of agency conflict between insiders and outsiders by mitigating infor-
mation asymmetry (e.g., Becker, DeFond, & Jiambalvo, 1998). How-
ever, to date, few studies have examined auditing issues in family
firms (Ho & Kang, 2013; Trotman & Trotman, 2010). This study adds
to the existing literature by investigating whether family ownership
and control configurations are systematically associated with a firm's
Received: 6 April 2015 Revised: 31 August 2017 Accepted: 1 September 2017
118 © 2017 John Wiley & Sons Ltd Corp Govern Int Rev. 2018;26:118–142.wileyonlinelibrary.com/journal/corg