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- Title
The Demand for External Auditing: Size, Debt and Ownership Influences.
- Authors
Chow, Chee W.
- Abstract
ABSTRACT: This study uses an agency theory framework to analyze firms' incentives to hire external auditing. It postulates that a major reason for firms to hire this service is to help control the conflict of interests among firm managers, shareholders, and bond-holders. Firm characteristics which affect the severity of this conflict or the marginal cost of external auditing are expected to influence a firm's demand for this service. Based on this analysis, leverage, firm size, and number of accounting-based debt covenants are predicted to increase the probability that a firm will voluntarily hire external auditing. The firm manager's ownership share is predicted to have the opposite effect. Univariate and multivariate tests were conducted on a sample of 165 NYSE and OTC firms from the year 1926. The results generally supported the hypothesized effects of leverage and accounting-based debt covenants, and moderately supported the predicted role of firm size. Manager ownership effects could not be tested due to data problems.
- Subjects
AUDITING of corporations; HIRE; FINANCIAL statements; AUDITING; EXECUTIVES; STOCKHOLDERS; DEBT; DIRECT costing; ACCOUNTING
- Publication
Accounting Review, 1982, Vol 57, Issue 2, p272
- ISSN
0001-4826
- Publication type
Article