Choice of Board Governance and Auditing in U.S. Family Firms

47 Pages Posted: 11 Jan 2011

See all articles by Bin Srinidhi

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Henry He

Hong Kong University of Science & Technology (HKUST)

Michael Firth

Lingnan University - Department of Finance and Insurance

Date Written: December 2010

Abstract

We show using a sample of U.S. listed firms that larger and older family firms and those that plan to access the capital market differentiate themselves from other family firms by choosing independent and effective corporate boards and by taking demonstrably independent board actions that are costly for exploitative insiders to mimic, such as choosing specialist auditors and exposing the firm to intensive scrutiny by the auditors. We show that the current evidence on higher earnings quality in family firms is driven by firms that choose strong boards. Although family firms generally pay lower audit fees than nonfamily firms because of lower risk, this result does not hold in family firms with strong governance. Such good-governance firms are more likely to choose specialist auditors than weak-governance firms and pay audit fees that are as high as those for nonfamily firms. We interpret these choices as suggesting that a subset of family firms signal their transparency to the market and separate themselves from other family firms. In a confirmatory test, we find that this subset of family firms enjoys better credit ratings.

Keywords: US Family firms, Corporate Governance, Earnings Quality, Auditor choice, Audit Fees

JEL Classification: M41

Suggested Citation

Srinidhi, Bin and He, Shaohuana and Firth, Michael, Choice of Board Governance and Auditing in U.S. Family Firms (December 2010). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1738191 or http://dx.doi.org/10.2139/ssrn.1738191

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Shaohuana He

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

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