High-qualify Auditors Mitigate The Agency Conflicts Between Major Shareholders And Minority Shareholders

The modern enterprises usually have two agency problems:one is between shareholders and management ,another is between major shareholders and minority shareholders. In Britain and the United States, the ownership structure is highly scattered. So the agency problems are focused on the first level; but in the East Asian economies, high ownership concentration is a feature of publicly listed companies. The main agency problem is focused on the second level. In China, the the state-owned shares in the listed company usually dominate the ownership structure. So the main agency problem is the conflicts between major shareholders and minority shareholders.Concentrated ownership nevertheless induces agency problems. Tight control creates an entrenchment problem that allows major owners'self-dealings to go unchallenged internally by boards of directors or externally by takeover markets. This entrenchment problem can come at a price to the major owners and their firms:outside investors anticipate the problem; hence, they discount the share prices and raise the difficulty for the firms to issue equities in the future.In emerging markets, the agency conflicts between major shareholders and the minority shareholders are difficult to mitigate through conventional corporate control mechanisms such as boards of directors and takeovers. We examine whether external independent auditors are employed as monitors or as bonding mechanisms,or both to alleviate the agency problems. Using a broad sample from Chinese A-shares of both Shenzhen Security Exchange and Shanghai Security Exchange in the period from 2002 to 2005 as our sample, we document that firms with agency problems embedded in the ownership structures are more likely to employ Big 4 auditors. This relation is evident among firms that have more agency problems. Consistently, firms hiring Big 4 auditors receive smaller share price discounts associated with the agency conflicts.Also, we find that Big4 auditors take into consideration their clients'agency problems when making audit report decisions. Taken together, these results suggest that Big 4 auditors do have a corporate governance role in emerging markets.According to the agency theory, the external auditor is a mechanism which reduces agency costs. But whether the external auditor can exactly play the role in enterprises depends on the quality the auditor has.The higher the agency costs are,the needs for high-quality auditors greater. The existing literature mostly concentrates on the highly developed capital markets such as the United States and Britain.A notable feature of this capital market is highly dispersed ownership structure, whose agency problems are mainly between management and shareholders. However, in China, the ownership structure often shows a concentrated ownership. Major shareholders can control over the enterprises effectively. Therefore, the principal agency problem faced by these enterprises is not the conflict between the management and external investors, but the conflict between major shareholders and minority shareholders. So, it is more meaningsful to investigate in China: If high-qualify auditors can mitigate the agency conflicts between major shareholders and minority shareholders; Major shareholders will also employ high-quality auditor to enhance the value of the company.In this article we investigate whether entrepreneurs in China voluntarily employ high-quality auditors to assure outside investors of the credibility of accounting information and hence mitigate the agency conflicts. In particular, we examine whether independent external auditors can serve a corporate governance role in safe guarding accounting information in China. There are five chapters in the paper.The first chapter is introduction. This part statements research background, the meaning of this thesis,the research track,the defect and further research.The second chapter reviews the literature on the agency conflicts between major shareholders and minority shareholders. In China, the principal agency conflicts faced by the listed companies are the conflicts between major shareholders and minority shareholders.In chapter three, I choose Big 4 auditors as a proxy for high-quality auditors. Then, I explain why I choose Big4 as a high-quality auditors variable from five reasons.In the fifth chapter, I develop four hypotheses. These four hypotheses are closely connected and explore in depth the theme in this paper. Secondly, According to the hypotheses, I build three models for regression analysis. I select the first large shareholder holdings proportion as a proxy for the conflicts between major shareholders and minority shareholders, and choose size, leverage, profitability and other variables to control the choice of the high-quality auditors. Finally, determine the study sample.We use a broad sample in China to examine whether firms hire name-brand (Big 4) auditors if they are subject to more agency conflicts. Big 4 auditors have international reputations and are generally perceived to be more independent than are local auditors. If Big 4 auditors provide better quality assurance, the demand for their services should increase in response to clients'agency problems.Our overall results suggest that high-qualify auditors can mitgate the conflicts beween major shareholders and minority shareholders in China. Firms are more likely to hire name-brand auditors when their ownership structures indicate agency conflicts. Specifically, firms are more likely to appoint Big 4 auditors when the conflicts are more severe. Moreover,such relations between auditor choice and agency conflicts are not evident among firms that are frequent equity issuers. We provide additional evidence that the appointment of Big4 auditors marginally mitigates share price discounts associated with the agency problem induced by the major shareholders, which supports the view that equity issuers can benefit from hiring quality auditors.Based on more restrictive data,we also find that Big4 auditors take into consideration agency conflicts when making audit report decisions, further supporting our conjecture that Big 4 auditors can mitgate the conflict beween major shareholders and minority shareholders in China. Main contributions and innovations:So far as the research contents, according to the incomplete statistics to relevant documents, there are still relatively few special documents on the function about external audit in corporate governance at home, and mostly concentrate on the theoretical research in this field. The comparatively systematic discussion on subject in this thesis has certain perspective.So far as the research angle, to some extent different from some past research angles, it is a new angle to regard specific corporate governance structure as the reference system, and then discuss this subject from the angle of auditing. This is a newer visual angle.So far as the research approach, what this thesis is adopted is the mixed method of theoretical analysis and empirical analysis. Through mechanism analysis, we have explained some questions about the proposition; through empirical analysis, we have proved the existence and meaning of the audit's function in mitigating the conflicts. Two kinds of methods confirm each other, have strengthened the explanation strength of argument, and have supported the proposition.