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 Auditor Choice and Audit Fees in Family Firms:

Evidence from the S&P 1500

Joanna L.Y. Ho*

jlho@uci.edu
The Paul Merage School of Business
University of California, Irvine
Irvine, CA 92617
Phone: (949) 824-4041
Fax: (949) 725-2833

Fei Kang
kang@csupomona.edu
California State Polytechnic University, Pomona
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3801 West Temple Avenue
Pomona, California 91768
Phone: 909-869-4539

accepted
manuscript
*
Contacting author

We would like to thank Peng-Chia Chiu, Timothy Haight, Xuan Huang, Sarah Lyon, Morton
Pincus, Xuehu Song, and Steve Wu for their helpful comments and suggestions.
 Auditor Choice and Audit Fees in Family Firms:

Evidence from the S&P 1500

Summary: We examine auditor choice and audit fees in family firms using data from Standard

and Poor’s (S&P) 1500 firms. We find that, compared to non-family firms, family firms are less

likely to hire top-tier auditors due to the less severe agency problems between owners and

managers. Our results also show that family firms on average incur lower audit fees than non-

family firms, which is driven by family firms’ lower demand for external auditing services and

auditors’ perceived lower audit risk for family firms. Our additional analysis indicates that the

tendency of family firms to hire non-top-tier auditors and to pay lower audit fees is stronger

when family owners actively monitor their firms.

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Keywords: Auditor choice; audit fees; family firms; agency problems.

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manuscript
 Auditor Choice and Audit Fees in Family Firms:

Evidence from the S&P 1500

INTRODUCTION

After the failure of Arthur Andersen and the passage of the Sarbanes-Oxley Act (SOX),

top-tier accounting firms were reduced to four and audit fees increased significantly (e.g., GAO

2006; Asthana et al. 2009). In turn, regulators (e.g., William McDonough, former Chairman of the

Public Company Accounting Oversight Board, and Christopher Cox, former Chairman of the

Securities and Exchange Commission) have expressed concern about the high degree of

concentration in the audit market and encouraged public companies to consider using smaller

accounting firms (Cox 2005; McDonough 2005). It would be useful to determine whether different

types of agency problems can explain public companies’ choice of smaller accounting firms and

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the variance in audit fees paid by these companies.

This study contributes to the extant literature in auditing by investigating auditor choice

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and audit fees in family firms, which have a special ownership structure and different types of

agency problems. Family firms are both manuscript

prevalent and important in the U.S. 1
Moreover,

Anderson and Reeb (2003) and Ali et al. (2007) find that the ownership structure of even large

public companies is often characterized by controlling stockholders from founding

families.2 Their findings provide a different picture of family firms in the U.S. compared to the

image of a more diffused ownership structure described by Berle and Means (1932). Trotman

and Trotman (2010) point out that in spite of the importance of family businesses worldwide and

the substantial amount of empirical research on family firms, there has been very limited

1
Prior studies suggest that approximately 80 percent of all businesses in the U.S. are family owned (Daily and
Dollinger 1992), and family businesses contribute more than 50 percent of the U.S. gross domestic product (Francis
1993).
2
Specifically, about one-third of the S&P 500 are family-controlled companies in which the founding families on
average own 11 percent of the cash flow rights and 18 percent of the voting rights.

1
research on family businesses related to auditing. Our study responds to the call by Trotman and

Trotman (2010) for research on auditing issues in publicly listed family firms.

Following prior studies (e.g., Ali et al. 2007; Chen et al. 2008), we define family firms as

those in which members of the founding family continue to hold positions in top management, sit

on the board, or are blockholders. 3 Family firms have a distinctive ownership structure, as

“founding families represent a unique class of shareholders that hold poorly diversified portfolios,

are long-term investors (multiple generations), and often control senior management positions”

(Anderson and Reeb 2003, 1304). Therefore, family owners are in a unique position to exert

influence and to monitor their firms, resulting in less severe Type I agency problems (between

managers and shareholders)4 in family firms than non-family firms. Nevertheless, family owners

may have both the incentive and opportunity to become involved in activities that are self-

beneficial but harmful to firm value, resulting in more severe Type II agency problems (between

large and small shareholders). preprint

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The unique class of family shareholders may influence firms’ auditor choice in two

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competing ways. On one hand, prior studies suggest that the demand for audit quality is driven

by information asymmetry and conflicts of interest between managers and investors (e.g., Watts

and Zimmerman 1983; Healy and Palepu 2001). Compared to non-family firms, family firms

have less severe Type I agency problems, which may result in a lower demand for high-quality

auditors. On the other hand, due to the more severe Type II agency problems, family firms may

have incentives to hire high-quality auditors as a signal of credible financial reporting in

3
Members of the founding family refer to the firm founder or his/her family members (by either blood or marriage).
Top management refers to key executives, including but not limited to chief executive officer and chief financial
officer. Blockholders refer to those who own at least 5 percent of the firm’s stocks.
4
Consistent with prior literature (e.g., Villalonga and Amit 2006; Chen et al. 2007), we refer to the agency problems
arising from the separation of ownership and management as Type I agency problems, and to those between large
and small shareholders as Type II agency problems.

2
exchange for better contracting terms (e.g., lower cost of capital) (Fan and Wong 2005). Overall,

different theories concerning Type I and II agency problems provide different predictions about

the effects of family ownership on auditor choice.

Family firms’ characteristics may also affect the level of audit fees. Family owners’ active

monitoring reduces the inherent risk of material misstatements in financial reporting, resulting in

lower audit effort. Further, the direct and close monitoring of firm activities by family owners

can lower information asymmetry between owners and managers, therefore reducing the demand

for a more stringent audit process and, in turn, further decreasing audit fees. However, the more

severe Type II agency problems suggest that family firms may incur higher audit fees due to

higher audit risk and greater audit effort. Therefore, the effect of family firm characteristics on

audit fees warrants empirical investigation.

Using data from S&P 1500 firms for the period 2000-2008, our overall results indicate
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that, on average, family firms are less likely to appoint Big N auditors5 and incur lower audit fees,

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and the tendency to hire non-Big N auditors and to pay lower audit fees is more significant for

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firms in which family owners are the largest shareholders. Our additional analysis shows that,

compared to family firms without dual-class shares, family firms with dual-class shares tend to

mitigate their more severe Type II agency problems by hiring Big N auditors to signal their

earnings quality and they incur higher audit fees. In addition, we find that active family control

(i.e., family members as CEOs or on the board) is associated with a lower tendency to hire top-

tier accounting firms and lower audit fees.

Our paper contributes to the extant literature in the following two ways. We use different

types of agency problems in family and non-family firms to explain their auditor choice and

5
Throughout this paper, Big N auditors refer to Big 5 auditors before the demise of Arthur Andersen and Big 4
auditors after that event.

3
audit fees. Our study not only responds to recent calls for research to examine how different

forms of ownership affect audit fees (Hay et al. 2006), but also provides additional insight into

the relationship between auditor choice and family ownership, a prevalent and important

ownership structure.

Further, studying the characteristics of family firms can help us better understand the

economic efficiency of corporate governance mechanisms (Shleifer and Vishny 1997). Prior

studies have documented how characteristics and corporate behaviors differ between family

firms and non-family firms (e.g., Anderson and Reeb 2003; Anderson et al. 2003; Wang 2006;

Ali et al. 2007; Chan et al. 2010; Wu et al. 2010; Chen et al. 2011).6 Our study adds to the extant

literature on family firms by examining their auditor choice and audit fees.

The remainder of the paper is organized as follows: The second section presents a review

of prior literature and develops our hypotheses. The third section provides a discussion of the
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sample and research design. The fourth section presents the empirical results, followed by

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additional analysis in the fifth section. The final section summarizes concluding remarks.

PRIOR LITERATURE ANDmanuscript

HYPOTHESIS DEVELOPMENT

Family Firms and Auditor Choice

Type I Agency Problems and Auditor Choice

Prior research in accounting argues that demand for audit quality is driven by information

asymmetry and conflicts of interest between managers and investors (e.g., Watts and

Zimmerman 1983; Healy and Palepu 2001). Compared to non-family firms, family firms are

6
For example, compared to non-family firms, family firms perform better (Anderson and Reeb 2003), have lower
cost of debt financing (Anderson et al. 2003), and provide better earnings quality (Wang 2006; Ali et al. 2007).
However, family firms have a higher likelihood of internal control weaknesses (Wu et al. 2010; Chen et al. 2011),
and their CEOs engage in more frequent insider trading and make larger and more profitable insider trades (Chan et
al. 2010).

4
subject to less severe Type I agency problems. As argued by Anderson and Reeb (2003),

founding families have historical presence in their firms and usually hold a large, undiversified

equity position and control management and director posts. They are therefore in a unique

position to influence and monitor their firms, which leads to lower information asymmetry and

fewer conflicts of interest between shareholders and managers. Using a sample of small private

firms in Finland, Niskanen et al. (2010) find that an increase in family ownership reduces the

likelihood of hiring Big 4 auditors. However, whether their result applies to public family firms

in the U.S. is not clear due to substantial differences in regulatory provisions between the two

countries and in the markets served by private versus public companies.7 Due to the argument set

forth above, we expect that in comparison to non-family firms, family firms have lower demand

for high-quality auditors to serve a monitoring function to alleviate Type I agency problems.8

Type II Agency Problems and Auditor Choice

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Conversely, concentrated ownership and the divergence between cash flow rights and

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voting rights induce agency conflicts between large and small shareholders. Tight control creates

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an entrenchment problem that allows controlling owners’ self-dealings to go unchallenged

internally by the board of directors or externally by takeover markets (Claessens et al. 2002).

However, this entrenchment problem may come at a price to the controlling shareholders and

their firms (e.g., discounted share prices when issuing additional shares of equity). Consequently,

the controlling shareholders may have incentives to hire a high-quality auditor as a signal of

7
As argued by Ball and Shivakumar (2005), private firms are less likely to use public financial statements in
contracting with other parties, and their financial reporting is more likely to be influenced by taxation, dividend, and
other policies. Therefore, compared to public firms, private firms have a lower demand for financial reporting
quality.
8
Although the audit committee appoints auditors and determines their remuneration, founding families may exercise
their influence in selecting board members and appointing members of the audit committee. In this regard, founding
families may indirectly affect auditor selection and audit fees.

5
credible financial reporting in exchange for better contracting terms (e.g., lower cost of capital).9

This argument is supported by Fan and Wong (2005), who found that in eight East Asian

economies, firms with Type II agency problems are more likely to employ Big 5 auditors to

mitigate the share price discounts associated with client firms’ agency problems. While legal

protection for minority shareholders is stronger in the U.S. than in East Asia, family firms in the

U.S. may still have incentives to hire Big N auditors to signal the quality of their financial

reporting and, hence, to reduce Type II agency costs.

Overall, existing theories concerning Type I and II agency problems provide competing

and alternative predictions about the effects of family ownership on auditor choice. Therefore,

family firms’ auditor choice would depend on the difference in the severity of their Type I and II

agency problems. Prior research argues that Big N auditors provide better quality service than

non-Big N auditors because of their scale, technical expertise, and reputational incentives to
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uncover and expose financial reporting irregularities (Barton 2005). The empirical evidence

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(DeFond and Jiambalvo 1993) also supports this argument. Therefore, we use the choice of Big

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N audit firms to proxy for demand for high-quality auditors and present the following hypothesis

concerning auditor choice:

H1: Family firms are less (more) likely to hire Big N audit firms than non-family firms
if the effect of Type I (II) agency problems dominates that of Type II (I) agency
problems.

Family Firms and Audit Fees

Type I Agency Problems and Auditor Fees

9
External auditors mainly assure minority shareholders and external parties that the company’s financial reporting
fairly reflects managers’ operation and investment decisions; external auditors have no responsibility to enhance
firm value. On the other hand, internal corporate governance mechanisms, such as external directors, play an
important role in monitoring managers’ daily operation and investment decisions. These external and internal
monitoring mechanisms may substitute each other. As family firms have more severe Type II agency problems, it is
important for them to resort to external instead of internal monitoring mechanisms to assure minority shareholders
and external parties of the firm’s financial reporting quality.

6
 Prior studies have examined the relationship between firm characteristics and audit fees,

using both supply-side and demand-side theories. From the supply-side perspective, Simunic

(1980) argues that firm characteristics affect the extent of audit work and, in turn, the level of

audit fees. In particular, prior studies have documented that assessed client risks are associated

with engagement efforts and, hence, audit fees. For example, Bell (2001) reports that audit fees

are raised when an engagement partner’s assessment of business risk increases. Bedard and

Johnstone (2004) find that auditors increase engagement efforts and billing rates when clients’

corporate governance is weak and when there is a relatively high earnings manipulation risk. As

discussed above, compared to other investors 10 , family owners have stronger incentives to

closely monitor managers, which may result in lower risk of material misstatements in financial

reporting, and therefore lower audit effort.

At the same time, demand-side theories suggest that the close and usually direct
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monitoring of firm activities by family owners can lower information asymmetry between

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owners and managers (Ali et al. 2007; Chen et al. 2008), resulting in lower demand for external

manuscript
auditing services. Based on demand-side theories and empirical evidence, we expect that the

existence of a potential alternative monitoring mechanism may further reduce the demand for

external auditing services by family firms, and therefore lower audit effort.

Taken together, both supply-side and demand-side theories lead us to predict that, in

comparison to non-family firms, family firms are associated with lower audit effort, and

therefore lower audit fees, because of their less severe Type I agency problems.

Type II Agency Problems and Auditor Fees

10
Some prior studies have documented the disinterest of some large (especially institutional) shareholders in their
companies’ performance, e.g., Bushee et al. (1998).

7
 Due to the Type II agency problems embedded in their firms, family owners may have

strong incentives to engage in self-beneficial activities, such as related-party transactions. This

will, in turn, increase the assessed risk of fraudulent reporting by auditors. This argument is

consistent with a recent Committee of Sponsoring Organizations (COSO) (2010) report that

examines instances of fraudulent reporting during the period 1998-2007 and identifies related-

party transactions as a potential risk factor for fraud. When client firms have more severe Type II

agency problems, auditors are required to perform more procedures to reduce audit risk to an

acceptable level. Therefore, the entrenchment problems within family firms may result in higher

audit fees.

In summary, compared to non-family firms, family firms have less severe Type I agency

problems and therefore lower audit fees, due to less audit effort required and lower demand for

audit quality. However, the more severe Type II agency problems in family firms lead to the
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prediction that they incur higher audit fees than non-family firms, due to higher audit risk and

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greater audit effort. Therefore, we present the following hypothesis concerning audit fees:

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H2: Family firms incur lower (higher) audit fees than non-family firms if the effect of
Type I (II) agency problems dominates that of Type II (I) agency problems.

RESEARCH METHODOLOGY

Model Specification

As suggested by Chaney et al. (2004), client firms are not randomly assigned to auditors,

and it is likely that firms self-select audit firms based on firm characteristics, private information,

or other unobservable characteristics. Therefore, we adopt the Heckman procedure (Heckman

1979, 2001) to allow simultaneity in firms’ auditor choice and audit fees, and also to address

8
potential bias in the standard ordinary least squares (OLS) regressions due to self-selection.11 In

addition, the Heckman procedure allows the coefficients in the fee equations to vary across

auditor types.

Following prior research (e.g., Chaney et al. 2004; Abbott et al. 2003), we test our

hypotheses on family firms’ auditor choice and audit fees using the following regressions (all the

variable definitions are summarized in Appendix A):

Auditor choice (1):

BIGN it = α 0 + α1 LTAit + α 2CHTAit + α 3 ATURN it + α 4 DAit + α 5CURRit + α 6QUICK it
+ α 7 ROAit + α 8 LOSSit + α 9 ROAit * LOSSit + α10 SUBit + α11 FORGNit + α12 BI it
+ α13CEOCHRit + α14 ACEXPit + α15 ACMTit + α16 ACSIZEit + α17 ACOUTit + α18 INSTit
+ α19CEOHOLDit + α 20 DIRit + α 21 FAM it + ui + d t + ε it

Audit fees (2):

LAFEEit = β 0 + β1 LTAit + β 2 ATURN it + β 3 DAit + β 4CURRit + β 5QUICKit + β 6 ROAit + α 7 LOSSit
+ β8 ROAit * LOSSit + β 9 SUBit + β10 FORGNit + β11OPINit + β12 NAFEEit + β13TENUREit

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+ β14 BUSYit + β15 BI it + β16CEOCHRit + β17 ACEXPit + β18 ACMTit + β19 ACSIZEit
+ β 20 ACOUTit + β 21 INSTit + β 22CEOHOLDit + β 23 DIRit + β 24 FAMit + β 25 IMRit + ui + d t + ε it

We estimate Equation (1) by probit regression to test H1 on family firms’ auditor choice
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(BIGN). To test H2 on audit fees (LAFEE), we first calculate the inverse Mills ratios (IMR) based
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on the coefficient estimates from the probit regression of Equation (1). To allow the slope

coefficients to vary across Big N and non-Big N clients, we then estimate Equation (2) for the

two groups separately by OLS with IMR included as an additional explanatory variable. As

argued by Lennox et al. (2012), it is inadvisable to estimate selection models without exclusion

restrictions, so we include the change in the absolute value of total assets (CHTA) as the

11
In addition, we follow Lennox et al.’s (2012) four practical suggestions to examine the robustness of our results.
First, it is inadvisable to estimate selection models without exclusion restrictions, so we include the change in the
absolute value of total assets (CHTA) as the exogenous variable in the first stage regression as discussed later.
Second, we report independent variables that are used in the first stage models. Third, we provide a theoretical
argument to support our choice of CHTA as the exogenous variable in the models in footnote 12. Fourth, because the
selection models are often fragile, it is essential to report sensitivity analyses in order to establish the robustness of
inferences. Therefore, we perform robustness checks by the regular OLS regressions for the audit fee model and
observe qualitatively similar results. The results are available upon request.

9
exogenous variable in the auditor choice model as suggested by Clatworthy et al. (2009).12

Test Variables

To test our hypotheses, we include in both regressions a dummy variable FAM, which

equals one if the firm is classified as a family firm. Moreover, to shed light on the impacts of

Type II agency problems on family firms’ auditor choice and audit fees, we conduct our analysis

by classifying family firms on the basis of whether or not they have dual-class shares (Claessens

et al. 2000; Villalonga and Amit 2006). The excess control and the divergence between voting

rights and cash flow rights by founding families give them incentives to seek private benefits at

the expense of other shareholders. Villalonga and Amit (2006) find that Tobin’s Q of family

firms with control-enhancing mechanisms is significantly lower than that of family firms without

such mechanisms. In light of the prior research, we perform our analysis by replacing the family

firm indicator (FAM) with two classification variables for family firms with dual-class shares

(FAM_DUAL) and those without (FAM_NDUAL). preprint

accepted
Finally, as shown by the descriptive statistics of family firms (Table 2), there is

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considerable variation in the level of family involvement in firm management across family

firms, which may affect their Type I agency problems and demand for high-quality audits.

Therefore, we examine the impact of different attributes of family firms on their auditor choice

and audit fees by replacing the family firm indicator (FAM) with the following family firm

characteristics: CEO type (founding family members who serve as CEOs [F_CEO] versus hired-

hand CEO [H_CEO]), percentage of family member directors on the board (FAM_DIR),

12
Similar to Clatworthy et al. (2009), we find that CHTA is statistically significant in the auditor choice model but
insignificant in the audit fee model. As argued by Clatworthy et al., the motivation for including CHTA in the auditor
choice model is that companies involved in large investments/acquisition or divestments/sale of assets may require
the expertise of an auditor due to the additional complexity of the audit. In addition, Keasey and Watson (1991) note
that the absolute change in firm size may, from an agency perspective, act as a proxy for contractual changes at the
firm level, which could prompt a change in the demand for auditing services.

10
percentage of common stock owned by founding family members (FAM_OWN), and percentage

of excess voting rights over cash flow rights held by founding family members (FAM_VC).

Control Variables

Following prior studies on auditor choice and audit fees, we expect that client firm size,

complexity, and risk affect auditor choice and audit fees (Carcello et al. 2002; Ashbaugh et al.

2003). We proxy firm size by the natural logarithm of total assets (LTA) and control for firm

complexity by assets turnover ratio (ATURN), current assets (CURR), square root of the number

of subsidiaries (SUB), and percentage of foreign sales (FORGN). To control for firm risk, we

include long-term debts ratio (DA), quick ratio (QUICK), return on assets (ROA), and loss (LOSS)

in the regressions. We also control for firms’ corporate governance characteristics and ownership

structure, including board independence (BI), CEO dual chair (CEOCHR), audit committee

characteristics (financial expertise ACEXP 13 , meeting frequency ACMT, size ACSIZE, and
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independence ACOUT), institutional ownership (INST), CEO ownership (CEOHOLD), and

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outside director ownership (DIR). In the audit fee model, we control for factors that may affect

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audit-client relationship, including auditor tenure (TENURE), the ratio of non-audit fees paid to

the auditor (NAFEE)14, and the presence of modified audit opinion (OPIN). In addition, industry-

and year-specific fixed effects (ui and dt) are included in both models to control for variation

across industries or over time.

Sample Selection

13
Following the SEC’s definition, we define financial expert broadly to include non-accounting financial experts.
14
Non-audit fee ratio measures the importance of consulting services relative to the total services provided by the
external auditor, and therefore it is an important proxy for audit-client relationship (Ghosh et al. 2009). The results
remain qualitatively similar if NAFEE is replaced with the natural log of non-audit fees in the models.

11
 The empirical analysis is performed on firms listed on the S&P 1500 index from 200015

through 2008. As discussed earlier, we define family firms as those in which founders or their

family members (by either blood or marriage) are key executives, directors, or blockholders (Ali

et al. 2007; Chen et al. 2008)16 and update the classification every year. Specifically, we first

identify key executives and directors for each firm year from ExecuComp and RiskMetrics

databases. Next, for each firm year, we read the proxy statement and corporate history (from

Hoover’s database and/or the firm’s website) to identify the founder and his/her family members

and check whether the founder or the family members are key executives, directors, or

blockholders. If so, we collect the ownership of the founding family. In addition, if the firm has

created control-enhancing mechanisms such as multiple share classes with differential voting

rights, pyramids, or voting agreements, we calculate the percentage of excess voting rights over

cash flow rights held by the founding family. Then, we obtain audit fees and auditor information
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from Audit Analytics, firms’ financial information from Compustat, corporate governance

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characteristics from RiskMetrics, and proxy statements and institutional ownership from CDA

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Spectrum. Finally, we merge all the above data, and exclude firms in regulated utilities and

financial institutions (two-digit SIC codes 40-44, 46, 48-49, and 60-69) due to the unique aspects

of their regulatory environments (Abbott and Parker 2000). As a result, our final sample includes

9,219 firm-year observations from 1,100 unique firms.

EMPIRICAL RESULTS

Descriptive Statistics

15
Year 2000 is the initial disclosure year for audit fee data mandated by the SEC.
16
As argued by Ali et al. (2007), using this definition does not exclude firms with limited influence of founding
family and has the following three benefits. First, it is free of any subjective assessment of family influence, thus
making the results more reliable. Second, to the extent a firm classified as a family firm has only weak family
influence, it would introduce a conservative bias in the results. Finally, this definition of a family firm has been
widely used by recent academic studies on family firms in the U.S., thus making it easier to compare our results with
prior studies.

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 Table 1 presents the sample distribution by year (Panel A) and by industry (Panel B). As

shown in Panel A, the number of firm-year observations in 2000, the initial disclosure year for

audit fee data mandated by the SEC, is lower than those in other sample years, as some data on

firms’ auditor choice and audit fees in this first year are missing from AuditAnalytics. We also

observe that the percentage of family firm observations slightly decreases from 2001 to 2005,

and has dropped below 38.0 percent since 2006.17 This declining trend is consistent with Wang’s

(2006) finding of family firms in the S&P 500. Additionally, the overall proportion of family

firm-years in the S&P 1500 in our sample (38.4 percent) is lower than that (46.3 percent) of

Chen et al. (2008), which may be attributed to the fact that our study employed a different

sample period (2000-2008) from Chen et al.’s (1996-2000). Panel B of Table 1 shows that family

firms operate in a broad array of industries, implying the importance of controlling for industry

effects in our models.

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[Insert Table 1 here]

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Table 2 presents the descriptive statistics for the variables for the full sample and

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subsamples of family and non-family firms. As shown in the table, 93.7 percent of the family

firms choose Big N auditors (BIGN), with an average audit fee (AFEE) of $1.8 million, while

96.1 percent of the non-family firms hire Big N auditors, with an average audit fee of $3.1

million. The differences in auditor choice and audit fees between family and non-family firms

are statistically significant.

Table 2 also shows that, compared to non-family firms, family firms tend to be smaller in

terms of total assets (TA) and to have higher assets turnover ratios (ATURN), higher current

ratios (CURR), and higher quick ratios (QUICK). Conversely, family firms have lower leverage

17
To test the robustness of our results, we perform analysis for a sample consisting of observations from 2006 to
2008, and find the results qualitatively similar to the main results.

13
ratios (DA), smaller numbers of subsidiaries (SUB), and smaller percentages of foreign sales

(FORGN). In addition, family firms tend to pay a higher ratio of non-audit fees and have shorter

auditor tenure.

As for board characteristics, family firms tend to have lower board independence (BI),

lower audit committee independence (ACOUT), less financial expertise on the audit committee

(ACEXP), and fewer audit committee members (ACSIZE). Additionally, family firms on average

have fewer institutional holdings (INST), but more CEO holdings (CEOHOLD) and higher

outside director ownership (DIR). Our results show 11.5 percent of the family firms have dual-

class shares (FAM_DUAL), and that on average founding family members own 13.0 percent of

cash flow rights (FAM_OWN) and the gap between voting rights and cash flow rights (FAM_VC)

is 21.5 percent. About one-third of the family firms (33.3 percent) are run by family-member

CEOs (F_CEO).18 On average, 17.0 percent of the board directors (F_DIR) are family members.
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[Insert Table 2 here]

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Table 3 presents the Pearson correlation matrix of the main variables. Auditor choice

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(BIGN) and audit fees (LAFEE) are significantly and negatively correlated with FAM, the

indicator for family firm. Other significant correlations between auditor choice, audit fees, and

firm characteristics (e.g., firm size) are consistent with those reported in prior studies. We also

present the pair-wise correlations between IMR and other variables in Panel B.

[Insert Table 3 here]

Regression Results for Auditor Choice

18
Our additional analysis shows that 66.0 percent (778/1,179) of the firms with family CEOs (F_CEO) also have
their CEOs serve as chairman of the board (CEOCHR). In other words, 15.3 percent (778/5,081) of the CEOCHRs
are also F_CEOs.

14
 Our regression results for testing H1 are presented in Table 4. 19 Three models are

presented, each with different measures to capture family ownership: an indicator variable

(FAM), classification variables for family firms with and without dual-class shares (FAM_DUAL

and FAM_NDUAL), and family firms’ attributes (F_CEO, H_CEO, FAM_DIR, FAM_OWN, and

FAM_VC). All models are significant at p < 0.001. 20 In Model 1, we find a significant and

negative coefficient on FAM (-0.116, p = 0.043), indicating that, compared to non-family firms,

family firms are less likely to hire Big N auditors.21 This result shows that the effect of Type I

agency problems dominates that of Type II agency problems on family firms’ auditor choice,

resulting in lower demand for high-quality auditors by family firms compared to non-family

firms.

Consistent with the results in Model 1, the coefficients for FAM_NDUAL and

FAM_DUAL are both significant and negative in Model 2. Moreover, the coefficient of
preprint
FAM_NDUAL is significantly smaller than that of FAM_DUAL22, which suggests that family

accepted
firms with dual-class shares tend to have more severe Type II agency problems than do family

manuscript
firms without such mechanisms and, therefore, have stronger need to hire Big N auditors to

signal firms’ earnings quality.

The results in Model 3 show that family firm attributes have different impacts on their

auditor choice. Specifically, the coefficients on F_CEO and FAM_DIR are significantly negative,

19
Throughout this paper, the p-values on the independent variables are two-tailed and based on standard errors
clustered by firm (Peterson 2009). As in our sample, the family ownership is likely to be correlated across years; we
calculate one-way (by firm) cluster-robust standard errors to correct for the time-series dependence.
20
We also perform diagnostic tests for multicollinearity and find that the variance inflation factor (VIF) scores on all
the variables in our models range from 1.052 to 9.238, which are below the standard cutoff of 10 (Kennedy 1998).
21
Wang (2006) and Ali et al. (2007) find that family firms have better earnings quality. In addition, prior literature
documents that Big N auditors are associated with better audit quality. However, our results show that family firms
are less likely to hire Big N auditors, which appears to be contradictory to the prior findings on the positive
association between earnings quality and family firms. To explain the seeming inconsistency between our results
and prior findings, we examine the relationship between family ownership, auditor choice, and earnings quality and
find that family firms have similar earnings quality regardless of auditor type.
22
The p-value for the pair-wise test is less than 0.001.

15
suggesting that family members’ active involvement in management and their board

representation further reduce Type I agency problems in the firms, resulting in lower demand for

high-quality auditors. Further, we find that the coefficient for FAM_OWN is significant and

negative23, but the coefficient for FAM_VC is significant and positive. These results indicate that

less severe Type I agency problems (proxied by FAM_OWN) reduce family firms’ demand for

high-quality auditors, while more severe Type II agency problems (proxied by FAM_VC)

increase their demand to hire Big N auditors to signal credible financial reporting, consistent

with findings in Fan and Wong (2005).

In regard to the control variables, our results are generally consistent with findings of

prior research (e.g., Ashbaugh et al. 2003; Chaney et al. 2004). The coefficients on LTA, CHTA,

and FORGN are significantly positive, suggesting that larger and complex firms are more likely

to appoint Big N auditors. We also find a significant and negative coefficient for CEOCHR,
preprint
suggesting that firms with the same person who holds both CEO and chairman of the board

accepted
positions are less likely to hire Big N auditors. Similar to Abbott and Parker (2000), we find that

manuscript
firms with active audit committees (ACMT) have higher demand for high-quality auditors. In

addition, the coefficients on ACEXP and ACSIZE are significantly positive, implying the higher

demand for high-quality audit services by larger audit committees and audit committees with

more financial expertise.

[Insert Table 4 here]

Regression Results for Audit Fees

Table 5 contains the results of audit fee regression, which is estimated separately for Big

N (Panel A) and non-Big N (Panel B) samples. As shown in Model 1, the coefficients on FAM (-

23
We also examine the potential nonlinear relationship between family ownership and auditor choice by including
the square of family ownership (FAM_OWN2) in the model. Our analysis shows an insignificant coefficient of
FAM_OWN2, which is not supportive of a nonlinear relationship between family ownership and auditor choice.

16
0.135, p = 0.000 for the Big N sample, -0.119, p = 0.007 for the non-Big N sample) are

significantly negative24, which suggests that, for firms choosing Big N (non-Big N) auditors, the

average audit fee of family firms is 13.5 percent (11.9 percent) lower than that of non-family

firms. As argued above, this result is driven by auditors’ perceived lower audit risk for family

firms and family firms’ lower demand for external audit services.

Consistent with the results in Model 1, the coefficients on FAM_NDUAL and

FAM_DUAL are significant and negative for both Big N and non-Big samples in Model 2.

However, the coefficients of FAM_NDUAL are significantly lower than those of FAM_DUAL25,

suggesting that family firms without dual-class shares tend to have less severe Type II agency

problems than do family firms with such mechanisms, therefore reducing the assessed audit risk

and audit fees.

The results in Model 3 show that family firm attributes also have different impacts on
preprint
their auditor fees. Specifically, the coefficients on F_CEO and FAM_DIR are significant and

accepted
negative, suggesting that having family members as CEOs or on the board of directors can better

manuscript
align managers’ interests with those of controlling families, resulting in less audit risk and,

therefore, lower audit fees. In addition, we find that the coefficients on FAM_OWN are

significant and negative, but those on FAM_VC are significant and positive. These results

indicate that less severe Type I agency problems (proxied by FAM_OWN) reduce family firms’

audit risk, while more severe Type II agency problems (proxied by FAM_VC) increase their

audit risk and, therefore, audit fees.

24
In the robustness checks, we exclude the observations from year 2000 and find the results similar to the main
results. In addition, we exclude observations from the financial crisis period (i.e., year 2008) and also observe
qualitatively similar results.
25
The p-values for the pair-wise tests are less than 0.001.

17
 Our results for control variables are generally consistent with prior research (e.g.,

Ashbaugh et al. 2003; Chaney et al. 2004; Krishnan and Visvanathan 2009). For example, audit

fees are positively associated with firm size (LTA) and complexity (ATURN, CURR, and

FORGN). In addition, audit committee characteristics have a significant impact on firms’ audit

fees. Specifically, firms with a larger audit committee (ACSIZE) or more active audit committee

(ACMT) on average incur higher audit fees, suggesting that large and active audit committees

tend to elicit greater efforts from their auditors and therefore are associated with higher audit fees

(Krishnan and Visvanathan 2009).

[Insert Table 5 here]

ADDITIONAL ANALYSIS

Alternative Definitions of Family Firms

To examine the sensitivity of our empirical results, we run regression analyses by using
preprint
alternative definitions of family firms, which include classifying family firms as those in which

accepted
founding family members are both key executives and blockholders; or those in which founding

manuscript
family members are both directors and blockholders; or those in which founding family members

are key executives, directors, and blockholders; or those in which founding family members own

at least 20 percent of the firm’s stocks. As shown in Table 6, our main results remain

qualitatively similar. We also decompose family firms into those with family owners as the

largest shareholders and those with others as the largest shareholders. Our results show that both

groups of family firms are less likely to hire top-tier accounting firms and incur lower audit fees

than non-family firms, and the tendency to hire non-Big N auditors and to pay lower audit fees is

more significant for firms in which family owners are the largest shareholders.

[Insert Table 6 here]

18
Family Firms’ Choice of Industry Specialist Auditors

Besides the brand name reputation as designated by Big N and non-Big N auditors, we

also examine family firms’ auditor choice along another dimension, i.e., industry-specialist

auditors. Due to their industry-specific knowledge, industry-specialist auditors are able to assist

clients in enhancing disclosure quality. Moreover, Reichelt and Wang (2010) find empirical

evidence that audit quality is higher when the auditor is both a national and city-specific industry

specialist. Following their research, we classify an auditor as an industry specialist if it maintains

industry expertise at both national and city levels. Our untabulated results show that family firms

are less likely to choose industry-specialist auditors, which is consistent with our prior argument

that the effect of Type I agency problems dominates that of Type II agency problems, resulting

in lower demand for high-quality audits by family firms than non-family firms.

Robustness Tests26

The Effect of Internal Control Weakness preprint

accepted
Hogan and Wilkins (2008) document that auditors charge higher audit fees to firms that

manuscript
disclose internal control weakness under the provisions of SOX, as these firms tend to have

higher levels of inherent risk and information risk. In addition, prior literature has shown that,

compared to non-family firms, family firms have a higher likelihood of internal control material

weakness due to their unique ownership structure (Wu et al. 2010). In light of the prior studies,

we include in both auditor choice and audit fee models a variable that captures the effect of

internal control material weakness. Untabulated results show that the impact of family ownership

(FAM) on firms’ auditor choice and audit fees remains significant and negative in both models

after controlling for the effect of internal control deficiency.

Other Robustness Tests

26
All the results in this section are untabulated and available upon request.

19
 In addition, we use different sampling and estimation techniques to conduct robustness

checks. First, we repeat our data analysis by using a matched sample for family firm

observations. Specifically, we match each family firm observation with a non-family firm from

the same two-digit SIC code and year with the closest firm size. We find untabulated results

qualitatively similar. Second, we apply a two-stage probit least squares (2SPLS) regression to

examine the effect of firm leverage on auditor choice.27 Again, our untabulated results confirm

that the likelihood of choosing Big N auditors for family firms is significantly lower than that of

non-family firms. Finally, we repeat our main analysis separately for S&P 500, S&P MidCap

400, and S&P SmallCap 600 firms as well as for pre- (2000-2001) and post-SOX (2002-2008)

periods. We find results for all the subsamples similar to those for the full sample.

CONCLUSION

Although the literature on auditor choice and audit fees is well developed, the relations
preprint
between family firms and auditor choice and audit fees are less established. Our research spans

accepted
2000-2008 and shows that, on average, family firms are less likely to hire Big N auditors. Our

manuscript
additional results indicate that firms with active family control (i.e., family members as CEOs or

on the board) are especially reluctant to appoint Big N auditors. Regulators have raised concerns

that the post-SOX period would give rise to a lack of competition among Big 4 accounting firms

(Cox 2005; McDonough 2005), but our findings that family firms have a lower likelihood of

hiring Big N auditors may at least partially alleviate such concerns. Our results also show that

family firms incur lower audit fees than non-family firms, which is driven by their lower audit

27
Recent studies (Mansi et al. 2004; Pittman and Fortin 2004) report that auditor choice affects a firm’s cost of debt
and target debt ratio, suggesting there is a potential reciprocal causal relation between auditor choice and leverage.
Therefore, we use the 2SPLS regression to control for potential endogeneity between auditor choice and leverage.
Specifically, in the first-stage regression, we predict firm leverage using firm size, fixed assets, tax shields, sales
growth, ROA, R&D expenses, and an indicator variable for manufacturing industry (Titman and Wessels 1988). And
in the second stage, we incorporate the variable of predicted firm leverage from the first stage into our auditor
choice model.

20
risk and demand for external auditing services. Our results are robust to alternative definitions of

family firms, and we find that the tendency to hire non-Big N auditors and to pay lower audit

fees is more significant for firms in which family owners are the largest shareholders.

We believe our findings on the empirical link between auditor choice and audit fees

enhance our understanding of the effect of ownership structure in financial reporting and the

audit planning process. As pointed out by Carcello et al. (2002), there has been heightened

interest among accounting professionals, the business community, and regulators in the relation

between corporate governance and financial reporting quality, and the relationships between

corporate governance mechanisms and the audit process have been a fruitful area of inquiry. Our

results suggest that ownership characteristics, as part of the governance mechanism, constitute an

important determinant of auditor selection and audit effort, and therefore have both policy and

practical implications for the demand and supply of audit services to firms with different
preprint
ownership structures. First of all, our study provides policy-makers and practitioners with critical

accepted
insight into differences in auditor selection criteria between family and non-family firms and

manuscript
differences in the severity of their Type I and II agency problems. Our empirical evidence also

sheds light on how family firms view and value the external audit and whether they are selecting

auditors on price or quality, or some combination of these factors. In addition, given the current

downward trend in audit revenues as a percentage of total revenues, our findings could lead

accounting firms to re-examine how they market audit services to family firms.

21
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24
 APPENDIX A
Variable Definitions
BIGN = 1 if the firm hires a Big N auditor, and 0 otherwise;
AFEE = audit fees in thousands;
LAFEE = natural logarithm of audit fees;
TA = total assets in thousands;
LTA = natural logarithm of total assets;
CHTA = absolute value of change in total assets from the previous year;
ATURN = assets turnover, measured as sales divided by total assets;
DA = long-term debts divided by total assets;
CURR = current assets divided by total assets;
QUICK = current assets minus inventory divided by current liabilities;
ROA = earnings before extraordinary items divided by lagged total assets;
LOSS = 1 if net income before extraordinary items is less than zero, and 0 otherwise;
SUB = square root of the number of subsidiaries;
FORGN = foreign sales as a percentage of total sales;
OPIN = 1 if the firm receives a modified audit opinion, and 0 otherwise;
NAFEE = non-audit fees divided by total fees paid to the auditor;
TENURE = the number of years of the auditor-client relationship;
BUSY = 1 if the firm’s year-end is between December and March, and 0 otherwise;

preprint
BI = the percentage of independent directors on the board;
CEOCHR = 1 if the CEO is also chairman of the board, and 0 otherwise;
ACEXP = 1 if the firm’s audit committee has at least one financial expert, and 0 otherwise;

accepted
ACMT = the number of audit committee meetings;
ACSIZE = the total number of directors on the audit committee;
ACOUT
INST
=
= manuscript
1 if the audit committee has solely independent directors, and 0 otherwise;
the percentage of shares held by institutional investors;
CEOHOLD = the percentage of shares held by CEO;
DIR = the percentage of shares held by outside directors;
FAM = 1 if the firm is classified as a family firm, and 0 otherwise;
FAM_DUAL = 1 for family firms with dual-class shares, and 0 otherwise;
FAM_NDUAL = 1 for family firms without dual-class shares, and 0 otherwise;
F_CEO = 1 for family firms with family member CEOs, and 0 otherwise;
H_CEO = 1 for family firms with hired-hand (non-family member) CEOs; and 0 otherwise;
FAM_DIR = the percentage of family member directors on the board;
FAM_OWN = the percentage of common stock owned by family members;
FAM_VC = the percentage of excess voting rights over cash flow rights held by family members
IMR = inverse Mills ratio;
u = industry-specific fixed effects (two-digit SIC code);
d = year-specific fixed effects (2001-2008).

25
 TABLE 1
Sample Distribution
Panel A: Distribution by year
No. of Firm- No. of Family % of Family
Year Years Percent Firm-Years Firm-Years
2000 618 6.7% 259 41.9%
2001 1,005 10.9% 429 42.7%
2002 1,098 11.9% 460 41.9%
2003 1,061 11.5% 429 40.4%
2004 1,084 11.8% 427 39.4%
2005 1,100 11.9% 428 38.9%
2006 1,084 11.8% 398 36.7%
2007 1,094 11.9% 360 32.9%
2008 1,075 11.7% 349 32.5%
Total 9,219 100.0% 3,539 38.4%

Panel B: Distribution by two-digit SIC code

No. of No. of Family % of Family
Industry Firm-Years Percent Firm-Years Firm-Years
13: Oil and gas extraction 404 4.4% 156 38.6%
15: General building contractors 113 1.2% 83 73.5%
20: Food and kindred products 345 3.7% 137 39.7%

preprint
23: Apparel and other textile products 124 1.3% 60 48.4%
27: Printing and publishing 139 1.5% 54 38.8%
28: Chemicals and allied products 792 8.6% 234 29.5%

accepted
33: Primary metal industries 176 1.9% 57 32.4%
34: Fabricated metal products 185 2.0% 70 37.8%
35: Industrial machinery and equipment
36: Electrical and electronic equipment manuscript
754
895
8.2%
9.7%
251
377
33.3%
42.1%
37: Transportation equipment 304 3.3% 107 35.2%
38: Instruments and related products 728 7.9% 265 36.4%
39: Miscellaneous manufacturing industries 114 1.2% 64 56.1%
50: Wholesale: durable goods 262 2.8% 133 50.8%
55: Auto dealers and gas stations 100 1.1% 75 75.0%
56: Apparel and accessory stores 231 2.5% 83 35.9%
58: Eating and drinking places 208 2.3% 81 38.9%
59: Miscellaneous retail 229 2.5% 93 40.6%
73: Business services 1,075 11.7% 436 40.6%
80: Health services 224 2.4% 105 46.9%
87: Engineering and management services 169 1.8% 68 40.2%
Other^ 1,648 17.9% 550 33.4%
Total 9,219 100.0% 3,539 38.4%
^Other includes those industries that have less than 100 firm-year observations or less than 50 family firm-year
observations.

26
 TABLE 2
Descriptive Statistics
Full Sample Family Firms Non-family Firms
(N=9,219) (N=3,539) (N=5,680) Differences
Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. in Mean
Auditor choice and audit fees
BIGN 0.952 0.214 0.937 0.243 0.961 0.193 -0.024***
AFEE 2,613.02 4,934.14 1,835.81 3,112.22 3,097.26 5,733.42 -1261.45***
Financial characteristics
TA 6,037.35 26,250.71 4,365.83 16,731.98 7,078.81 30,680.42 -2712.98***
CHTA 762.196 4,119.54 551.043 1,955.40 893.759 5,011.90 -342.716***
ATURN 1.232 0.876 1.274 0.911 1.206 0.853 0.068***
DA 0.171 0.165 0.158 0.173 0.179 0.16 -0.021***
CURR 0.459 0.218 0.478 0.232 0.447 0.208 0.031***
QUICK 1.947 2.439 2.136 2.649 1.83 2.29 0.306***
ROA 0.06 0.196 0.058 0.258 0.061 0.145 -0.002
LOSS 0.152 0.359 0.149 0.357 0.154 0.361 -0.004
SUB 3.889 2.176 3.374 1.931 4.211 2.316 -0.837***
FORGN 0.24 0.333 0.21 0.248 0.259 0.375 -0.050***
OPIN 0.209 0.406 0.208 0.406 0.209 0.407 -0.001
NAFEE 0.294 0.227 0.307 0.232 0.286 0.224 0.021***
TENURE
BUSY
13.488
0.76
19.401
0.427
preprint
12.135
0.709
16.677
0.454
14.332
0.792
20.876
0.406
-2.197***
-0.082***
Corporate governance characteristics
BI 0.551 0.301 0.539
accepted
0.276
0.559 0.316 -0.02***

manuscript
CEOCHR 0.551 0.497 0.542 0.498
0.557 0.497 -0.015
ACEXP 0.973 0.162 0.965 0.184
0.978 0.147 -0.013***
ACMT 7.227 3.838 7.148 3.951 7.277 3.765 -0.129
ACSIZE 3.618 1.025 3.457 0.933 3.718 1.078 -0.261***
ACOUT 0.943 0.142 0.931 0.152 0.951 0.135 -0.020***
INST 0.717 0.278 0.691 0.261 0.733 0.287 -0.042***
CEOHOLD 0.018 0.056 0.033 0.074 0.009 0.037 0.024***
DIR 0.034 0.083 0.045 0.09 0.027 0.078 0.018***
FAM_DUAL 0.115 0.319
F_CEO 0.333 0.471
FAM_DIR 0.170 0.148
FAM_OWN 0.130 0.177
FAM_VC 0.215 0.223

*, **, *** Denote significance at the 0.1, 0.05, and 0.01 levels, respectively.
Statistical test for differences in mean is based on a two-tailed t-test. See Appendix A for variable definitions.

27
 TABLE 3
Pearson Correlation Matrix
Panel A: Correlations among main variables
FAM BIGN LAFEE LTA CHTA ATURN DA CURR QUICK ROA LOSS SUB FORGN
BIGN -0.05
LAFEE -0.17 0.11
LTA -0.10 0.19 0.76
CHTA -0.04 0.04 0.26 0.34
ATURN 0.04 -0.01 -0.10 -0.10 -0.06
DA -0.06 0.09 0.14 0.24 0.04 -0.15
CURR 0.07 -0.12 -0.20 -0.39 -0.14 0.27 -0.41
QUICK 0.06 -0.11 -0.26 -0.28 -0.06 -0.22 -0.18 0.39
ROA -0.01 -0.03 0.00 0.01 -0.05 0.13 -0.09 0.04 -0.02
LOSS -0.01 0.00 -0.04 -0.12 0.02 -0.15 0.10 0.06 0.09 -0.42
SUB -0.05 0.04 0.27 0.24 0.10 -0.07 0.07 -0.13 -0.12 -0.02 -0.04
FORGN
OPIN
-0.07
-0.07
0.04
0.05
0.27
0.28
0.15
0.20
0.04
0.07 preprint
-0.17
-0.05
-0.06
0.06
0.11
-0.10
0.05
-0.08
-0.02
-0.01
0.03
0.02
0.07
0.07 0.05
NAFEE 0.04 0.12 -0.27 0.05 0.05 -0.02 0.04 -0.01 0.01 -0.05 0.03 0.04 -0.01

accepted
TENURE -0.06 0.09 0.32 0.33 0.15 -0.03 0.05 -0.09 -0.11 0.02 -0.05 0.13 0.09
BUSY -0.09 -0.05 0.04 0.03 0.02 -0.01 0.06 -0.07 -0.01 -0.02 0.04 -0.04 -0.04

manuscript
BI -0.03 0.05 0.42 0.42 0.08 -0.04 0.08 -0.13 -0.10 -0.02 -0.03 0.13 0.14
CEOCHR -0.02 0.03 0.16 0.26 0.04 -0.03 0.08 -0.11 -0.05 0.01 -0.04 0.11 0.06
ACEXP -0.04 0.04 0.07 0.03 0.01 0.03 0.00 0.03 0.01 -0.02 0.01 -0.01 0.01
ACMT -0.02 0.01 0.35 0.19 0.05 0.00 -0.02 0.00 -0.04 0.01 0.00 0.05 0.07
ACSIZE -0.04 0.07 0.33 0.39 0.06 -0.02 0.08 -0.14 -0.10 0.00 -0.05 0.16 0.10
ACOUT 0.00 0.03 0.26 0.28 0.02 -0.04 0.03 -0.07 -0.03 -0.01 -0.02 0.09 0.10
INST -0.07 0.03 0.21 0.11 -0.06 0.01 0.04 0.00 -0.03 0.06 -0.09 0.01 0.05
CEOHOLD 0.21 -0.12 -0.10 -0.10 -0.03 0.06 -0.06 0.06 0.04 0.02 -0.01 -0.05 -0.06
DIR 0.10 -0.07 0.02 -0.01 -0.03 0.03 0.01 -0.02 -0.03 -0.02 0.01 -0.03 -0.04
(Continued)

28
 Panel A (Continued)
OPIN NAFEE TENURE BUSY BI CEOCHR ACEXP ACMT ACSIZE ACOUT INST CEOHOLD
NAFEE -0.16
TENURE 0.07 0.00
BUSY 0.05 -0.02 -0.02
BI 0.18 -0.13 0.25 -0.03
CEOCHR -0.02 0.10 0.14 -0.01 0.36
ACEXP 0.06 -0.07 0.05 -0.04 0.03 -0.03
ACMT 0.17 -0.28 0.02 -0.02 0.18 -0.01 0.06
ACSIZE 0.05 -0.01 0.23 -0.02 0.62 0.49 -0.01 0.10
ACOUT 0.05 -0.07 0.16 -0.05 0.63 0.48 0.00 0.14 0.83
INST 0.12 -0.25 0.03 -0.03 0.32 0.15 0.07 0.21 0.22 0.28
CEOHOLD -0.05 0.00 -0.05 -0.02 -0.03 0.08 -0.07 -0.03 0.00 0.04 -0.11
DIR 0.05 -0.10 -0.01 -0.02 0.21 0.03 0.01 0.03 0.11 0.15 0.00 0.19

Panel B: Pairwise correlations of IMR with other variables in the audit fee Model 1^

LAFEE LTA ATURN DA CURR QUICK ROA LOSS SUB FORGN OPIN NAFEE
IMR 0.01 0.00 0.00 0.00 0.00 preprint
0.00 0.00 0.00 0.00 0.00 0.03 0.05

TENURE BUSY BI CEOCHR ACEXP ACMT ACSIZE ACOUT INST CEOHOLD DIR FAM
IMR 0.05 -0.05 0.00 0.00 0.00
accepted
0.00 0.00 0.00 0.00 0.00 0.00 0.00

manuscript
^ Under the Heckman procedure, different regression models yield different IMRs. Due to the space limitation, we only report the correlations of IMR with
other variables in the audit fee Model 1. The correlations among IMR and controlling variables in other models are available upon request.
Coefficients in bold are significant at 0.1 level. See Appendix A for variable definitions.

29
 TABLE 4
Family Firms and Auditor Choice
Dependent Variable: BIGN
Independent Model 1 Model 2 Model 3
Variable Coeff. p-value Coeff. p-value Coeff. p-value
Intercept 1.276 1.000 1.291 1.000 1.312 1.000
FAM -0.116 0.043
FAM_NDUAL -0.119 0.041
FAM_DUAL -0.091 0.083
F_CEO -0.044 0.000
H_CEO -0.089 0.352
FAM_DIR -0.520 0.043
FAM_OWN -0.271 0.078
FAM_VC 0.357 0.069
LTA 0.344 0.000 0.345 0.000 0.333 0.000
CHTA 0.001 0.050 0.001 0.049 0.001 0.022
ATURN -0.004 0.913 -0.004 0.911 -0.003 0.955
DA 0.143 0.433 0.154 0.417 0.201 0.301
CURR -0.003 0.973 -0.002 0.993 -0.009 0.957

preprint
QUICK -0.023 0.009 -0.023 0.008 -0.025 0.006
ROA -0.082 0.620 -0.101 0.607 -0.009 0.696
LOSS 0.069 0.486 0.057 0.539 0.071 0.386

accepted
ROA*LOSS -1.107 0.062 -1.212 0.021 -1.234 0.027
SUB -0.020 0.281 -0.020 0.273 -0.029 0.200
FORGN
BI
0.551
0.214
manuscript
0.000
0.152
0.553
0.219
0.000
0.148
0.597
0.207
0.000
0.168
CEOCHR -0.132 0.043 -0.126 0.038 -0.143 0.029
ACEXP 0.579 0.000 0.588 0.000 0.592 0.000
ACMT 0.003 0.050 0.004 0.050 0.005 0.049
ACSIZE 0.095 0.010 0.096 0.009 0.101 0.006
ACOUT -0.162 0.659 -0.118 0.620 -0.102 0.579
INST 0.201 0.084 0.197 0.091 0.227 0.051
CEOHOLD -0.020 0.000 -0.020 0.000 -0.026 0.000
DIR -0.597 0.054 -0.594 0.053 -0.648 0.038
Year Fixed Effects Controlled
Industry Fixed Effects Controlled
Pseudo R-square 0.289 0.292 0.320
Observations 9,219
The p-values are two-tailed and based on standard errors clustered by firm. See Appendix A for
variable definitions.

30
 TABLE 5
Family Firms and Audit Fees
Panel A: Firms choosing Big N auditors (Dependent Variable--LAFEE)
Independent Model 1 Model 2 Model 3
Variable Coeff. p-value Coeff. p-value Coeff. p-value
Intercept 3.335 0.000 3.537 0.000 3.566 0.000
FAM -0.135 0.000
FAM_NDUAL -0.155 0.000
FAM_DUAL -0.134 0.000
F_CEO -0.095 0.001
H_CEO -0.039 0.056
FAM_DIR -0.334 0.000
FAM_OWN -0.032 0.067
FAM_VC 0.005 0.033
LTA 0.565 0.000 0.564 0.000 0.559 0.000
ATURN 0.036 0.000 0.035 0.000 0.036 0.000
DA 0.154 0.000 0.177 0.000 0.179 0.000
CURR 0.615 0.000 0.652 0.000 0.646 0.000
QUICK -0.062 0.000 -0.061 0.000 -0.061 0.000
ROA -0.421 0.000 -0.644 0.000 -0.647 0.000
LOSS 0.162 0.000 0.157 0.000 0.139 0.000
ROA*LOSS
SUB
-0.533
0.036
preprint
0.000
0.000
-0.696
0.036
0.000
0.000
-0.601
0.036
0.000
0.000
FORGN 0.284 0.000 0.283 0.000 0.284 0.000
OPIN
NAFEE
0.115
-0.627 accepted
0.000
0.000
0.117
-0.622
0.000
0.000
0.116
-0.635
0.000
0.000
TENURE
BUSY
0.003
0.111
manuscript
0.000
0.000
0.003
0.115
0.000
0.000
0.003
0.126
0.000
0.000
BI 0.039 0.198 0.033 0.303 0.025 0.704
CEOCHR 0.016 0.277 0.016 0.263 0.017 0.199
ACEXP 0.013 0.279 0.015 0.636 0.016 0.602
ACMT 0.018 0.000 0.019 0.000 0.019 0.000
ACSIZE 0.021 0.001 0.025 0.001 0.024 0.001
ACOUT 0.057 0.219 0.057 0.212 0.071 0.155
INST -0.090 0.000 -0.099 0.000 -0.100 0.000
CEOHOLD -0.003 0.014 -0.003 0.013 -0.002 0.114
DIR -0.119 0.091 -0.121 0.095 -0.126 0.096
IMR 0.658 0.000 0.634 0.000 0.593 0.000
Year Fixed Effects Controlled
Industry Fixed Effects Controlled
Adj. R-square 0.821 0.822 0.822
Observations 8,777

31
 TABLE 5 (continued)
Panel B: Firms choosing non-Big N auditors (Dependent Variable--LAFEE)
Independent Model 1 Model 2 Model 3
Variable Coeff. p-value Coeff. p-value Coeff. p-value
Intercept 2.066 0.000 1.770 0.000 1.558 0.000
FAM -0.119 0.007
FAM_NDUAL -0.129 0.000
FAM_DUAL -0.109 0.028
F_CEO -0.278 0.000
H_CEO 0.334 0.502
FAM_DIR -0.676 0.002
FAM_OWN -0.203 0.010
FAM_VC 0.339 0.000
LTA 1.200 0.000 1.233 0.000 1.369 0.000
ATURN 0.124 0.007 0.166 0.001 0.129 0.002
DA 0.023 0.858 0.137 0.549 0.406 0.223
CURR 0.258 0.086 0.267 0.084 0.348 0.022
QUICK -0.065 0.000 -0.071 0.000 -0.069 0.000
ROA -0.388 0.002 -0.349 0.000 -0.473 0.005
LOSS 0.356 0.000 0.336 0.000 0.341 0.000
ROA*LOSS -3.094 0.000 -4.110 0.000 -4.664 0.000
SUB
FORGN
0.030
1.801
preprint
0.200
0.000
0.024
1.972
0.523
0.000
0.009
2.104
0.714
0.000
OPIN 0.126 0.024 0.118 0.030 0.127 0.025
NAFEE
TENURE
-0.923
-0.001 accepted
0.000
0.669
-0.814
-0.005
0.000
0.230
-0.864
-0.003
0.000
0.715
BUSY
BI
0.078
0.012
manuscript
0.367
0.945
0.191
0.116
0.164
0.441
0.050
0.156
0.567
0.514
CEOCHR 0.226 0.017 0.274 0.003 0.356 0.001
ACEXP 0.060 0.022 0.061 0.010 0.103 0.000
ACMT 0.024 0.010 0.025 0.022 0.022 0.039
ACSIZE 0.062 0.055 0.046 0.063 0.069 0.000
ACOUT 0.170 0.483 0.152 0.279 0.166 0.510
INST -0.047 0.776 -0.021 0.645 0.129 0.390
CEOHOLD -0.038 0.003 -0.042 0.000 -0.057 0.000
DIR -0.867 0.048 -0.904 0.023 -1.163 0.008
IMR 2.305 0.003 2.475 0.001 2.872 0.000
Year Fixed Effects Controlled
Industry Fixed Effects Controlled
Adj. R-square 0.803 0.810 0.831
Observations 442
The p-values are two-tailed and based on standard errors clustered by firm. See Appendix A for variable
definitions.

32
 TABLE 6
Alternative Definitions for Family Firms

5% & Sitting on the

5% & Sitting on the 5% & Top board & Top
Family firm criteria board management management 20% Ownership
% of family firms in the sample 21.26% 6.56% 6.45% 8.41%
Regression Results Coeff. p-value Coeff. p-value Coeff. p-value Coeff. p-value

FAM in the audit choice model -0.191 0.003 -0.152 0.039 -0.163 0.038 -0.108 0.021

FAM in the audit fee model for

Big N Clients -0.154 0.000 -0.127 0.000 -0.125 0.000 -0.103 0.000

FAM in the audit fee model for

non-Big N clients -0.245 0.011 -0.217 0.013 -0.273 0.008 -0.080 0.004

Family owners as the

largest
preprint
Family owners not the
largest
% of family firms in the sample 7.73% 30.65%
Regression Results Coeff. p-value
accepted
Coeff. p-value

FAM in the audit choice model -0.183 0.043 manuscript

-0.106 0.028
FAM in the audit fee model for Big
N Clients -0.152 0.000 -0.095 0.000
FAM in the audit fee model for
non-Big N clients -0.265 0.042 -0.064 0.039

The results are abbreviated. The p-values are two-tailed and based on standard errors clustered by firm.

33