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 Auditors and the Principal-Principal Agency Conflict
in Family-Controlled Firms

Chiraz Ben Ali

John Molson School of Business, Concordia University
1455 de Maisonneuve West
Montreal, QC H3G 1M8, Canada
chiraz.benali@concordia.ca

Sabri Boubaker
EM Normandie Business School, Métis Lab, France
IRG (EA 2354), Université Paris Est, Créteil, France
sboubaker@em-normandie.fr

Michel Magnan
John Molson School of Business, Concordia University
CIRANO
1455 de Maisonneuve West
Montreal, QC H3G 1M8, Canada
michel.magnan@concordia.ca

Forthcoming
Auditing: A Journal of Practice & Theory

                                                            

  The authors acknowledge the financial support of the Stephen A. Jarislowsky Chair in Corporate Governance
(Concordia University), the Institute for Governance of Public and Private Organizations, the Desjardins Centre
for Business Finance Innovation (Concordia University), EM Normandie Business School, and IPAG Lab.
Comments were received from attendees of annual conferences of the Association academique internationale de
gouvernance and the European Accounting Association as well as from Imen Derouiche, Elisabeth Peltier, Wael
Rouatbi, Walid Saffar, and participants of a workshop held by CREM (IGR-IAE de Rennes, Université de
Rennes I) and Centre Magellan of IAE Université Jean-Moulin (Lyon III).

1
 Auditors and the Principal-Principal Agency Conflict
in Family-Controlled Firms

SUMMARY

This paper examines whether multiple large shareholders (MLS) affect audit fees in firms
where the largest controlling shareholder (LCS) is a family. Results show that there is a
negative relationship between audit fees and the presence, number, and voting power of
MLS. This is consistent with the view that auditors consider MLS as playing a monitoring
role over the LCS, mitigating the potential for expropriation by the LCS. Therefore, our
evidence suggests that auditors reduce their audit risk assessment and audit effort and
ultimately audit fees in family-controlled firms with MLS.

Keywords: multiple large shareholders; private benefits of control; corporate governance;

audit fees.

JEL classification : G32; G34; M42; D86

Data Availability: Data are available from the public sources cited in the text.
 

2
 I. INTRODUCTION

This paper examines whether the presence and power of multiple large shareholders (MLS)

beyond the controlling shareholder influence the level of audit fees paid by family-controlled

firms in France, a country with poor investor protection (La Porta, Lopez-de-Silanes,

Shleifer, and Vishny 1998). Emerging literature focusing on the agency conflict between

controlling and non-controlling shareholders considers this conflict more detrimental to

shareholder value than the one between managers and shareholders (Harvey, Lins, and Roper

2004; Holderness 2009; La Porta, Lopez-de-Silanes, and Shleifer 1999;  Lin, Ma, Malatesta,

and Xuan 2013). However, most of this research relies on the implicit assumption that there

is a single controlling shareholder in firms with concentrated ownership, thus neglecting the

potential monitoring role of blockholders beyond the largest controlling shareholder (LCS).1

This paper addresses this gap.

We focus on auditing within family-controlled firms for several reasons. First, family

businesses constitute an important part of the world economy, even in the United States

(Anderson and Reeb 2003; Ernst & Young 2017). For example, Chen, Chen, and Cheng

(2008) and Kang (2014) report that family firms account for 46 percent and 38 percent of the

Standard & Poor’s (S&P) 1500 firms, for the period 1996–2000 and 2000–2008, respectively.

However, despite their widespread presence around the world, Trotman and Trotman (2010)

find limited research on how family ownership affects auditing. Second, families have strong

incentives to expropriate non-controlling shareholders, as the private benefits of control are

not diluted among several independent owners (Villalonga and Amit 2006). Private benefit

concentration exacerbates the principal-principal agency problem. Moreover, there are

several control-enhancing mechanisms whereby families can control firms while holding only

                                                            
1
Blockholders are labeled multiple large shareholders (MLS) in this literature.

3
small ownership stakes (e.g., dual class share and pyramid structures). This provides them

with additional incentives to divert corporate resources (e.g., Claessens, Djankov, Fan, and

Lang 2002; Villalonga and Amit 2006).2 Third, ownership in family-controlled firms is more

heterogeneous than is widely assumed. Contrary to the prevailing idea that family firms are

privately owned, many French family firms are actually listed on the Euronext (Ben Ali and

Lesage 2013). For instance, 18 of the CAC 40 largest firms in France (based on their stock

market capitalization, as reflected by the CAC 40 Stock Market Index) are ultimately

controlled by families. Furthermore, from Ben-Nasr, Boubaker, and Rouatbi (2015), we can

infer that about 80 percent of French non-financial listed firms are ultimately controlled by

families.

We consider that family control potentially raises concerns for auditors, thus affects

their determination of potential audit risk and, ultimately, their effort and fees. Entrenched

family owners, who often control both management and the board, have the opportunity to

engage in transactions that undermine non-controlling shareholders’ interests, e.g., tunneling

or poor financial reporting, both of which are within the scope of the audit. Such a situation

gives rise to a principal-principal agency problem (e.g., Johnson, La Porta, Lopez-de-Silanes,

and Shleifer 2000). This problem is especially acute when investor protection is low, as in

France (Maury 2006). However, in addition to the controlling family as LCS, there may be

other blockholders (MLS) who, unlike dispersed public shareholders, have the incentives and

means to monitor the LCS and, potentially, to counter its influence (Attig, Guedhami, and

Mishra 2008; Laeven and Levine 2008; Mishra 2011). This tension between the LCS and

MLS is likely to mitigate audit risk and may lead auditors to exert less effort, thus resulting in

                                                            
2
Prior research shows that the separation between voting rights and cash flow rights is prevalent globally (e.g.,
Faccio and Lang 2002), even in the United States where it reached 24 percent of firms going public in 2015
(while it was only 1 percent of U.S. dual-class initial public offerings in 2005). For instance, Forst and
Hettler (2019) examine the impact of disproportionate insiders’ power through dual class shares in US-listed
firms and find that auditing can mitigate such agency problems.

4
lower audit fees. Alternatively, MLS may choose to collude with the LCS to share in private

benefits, thus exacerbating the principal-principal agency problem by conferring excessive

power to a few entrenched owners (Cai, Hillier, and Wang 2016; Villalonga and Amit 2006).

This collusion between the LCS and MLS is likely to increase audit risk leading to higher

audit fees. Focusing on French family-controlled firms allows us to examine which one of

these competing arguments regarding the role of MLS prevails.

France offers an interesting setting to examine audit effort, as proxied by audit fees, in

the context of family firms. Because of France’s regulations imposing a 6-year joint audit

engagement, auditor independence should increase. In addition, this regulation helps mitigate

any principal-principal problem (e.g., Johnson, Khurana, and Reynolds 2002). Prior work

provides evidence that a joint audit raises audit quality under certain conditions (e.g., Bianchi

2018). Furthermore, in civil law countries with poor investor protection, such as France,

investors have limited means available to seek recourse against the diversion of corporate

resources by the LCS (e.g., La Porta et al. 1999). Thus, higher quality auditing can stand in

for weak law enforcement. Finally, because of its relatively poor investor protection, France

offers an environment where the effect of litigation on audit fees is somewhat limited

(Wingate 1997). Overall, we consider that France’s institutional context increases the

reliability of audit fees as a measure of auditor effort.

We conduct our analyses using a comprehensive hand-collected sample of French

family-controlled firms over the 2003–2013 period (2,028 firm-year observations [295

distinct firms]). Consistent with prior research, we deem a firm to be family controlled if its

LCS is an individual owner or a group of individual owners linked by marriage or blood ties

(e.g., Claessens et al. 2002). Our results show that auditors are sensitive to the extent of the

principal-principal agency conflict. More importantly, we find a negative relationship

5
between audit fees and the presence, number, and voting power of MLS; in other words,

firms with MLS pay lower audit fees. Such a finding supports the view that MLS play a

governance role by monitoring the LCS, thus reducing its ability to expropriate non-

controlling shareholders. Faced with reduced audit risk, auditors can therefore afford to lower

their audit effort and fees. This result is also consistent with auditing reflecting agency costs

such that audit fees are likely to increase (decrease) when agency conflicts are high (low)

(Barroso, Ben Ali, and Lesage 2018).

To further corroborate these results, we investigate alternative measures of LCS

control contestability (Boubaker, Rouatbi, and Saffar 2017; Maury and Pajuste 2005), i.e., the

Shapley value (SHAPLEY1) and the principal component analysis index of several MLS

variables (PCA_INDEX)). We introduce the Shapley value (Milnor and Shapley, 1978) to

capture the impact of the dispersion of control stakes between large blockholders on audit

fees. We find that higher contestability of the LCS’s power by MLS (i.e., a low SHAPLEY1

value) is associated with lower audit fees, suggesting that MLS play a monitoring role. Also,

consistent with our main result, we find a negative relation between audit fees and the

PCA_INDEX, confirming that the presence and power of MLS decrease audit fees. In

addition, as audit client firms are not randomly assigned to auditors, we control for

endogeneity using an instrumental variable approach and a propensity-score matching (PSM)

technique (Forst and Hettler 2019). Our results remain qualitatively unchanged. Finally, our

findings are robust to alternative sample compositions, i.e., adding non–family-controlled

firms or excluding firms with pyramidal ownership structures.

This paper contributes to audit and corporate governance research in several ways.

First, it provides an additional perspective to the ongoing debate on the extent and value of

the work performed by auditors and their role in the financial reporting process within

6
family-controlled firms.3 Our results show that auditors adjust their effort, as reflected by

audit fees, in light of differing ownership configurations within family-controlled firms. In

this regard, we respond to the call for research by Prencipe, Bar-Yosef, and Dekker (2014) on

the impact of family influence on auditing characteristics, including audit fees. Second, our

findings are consistent with auditors considering family-controlled firms with MLS as

representing less audit risk. As a result, auditors expend less effort and charge lower fees.

Hence, we can infer that MLS play a governance role in mitigating the principal-principal

agency problem (Barroso-Casado, Burkert, Dávila, and Oyon 2016). Our research thus sheds

additional light on the question as to whether or not MLS ally themselves with the LCS to

extract and share private benefits of control (Bennedsen and Wolfenzon 2000; Mishra 2011).

Third, this paper builds upon recent work regarding the challenging environment faced by

auditors, especially relating to audit fees, when there is disproportionate control by insiders

(e.g., Forst and Hettler 2019). This disproportionate control results from a wedge between

control and cash flow rights and is especially prevalent in family-controlled firms. Our

evidence implies that, while such a wedge is important in driving audit fees, it must be

considered within the context of a firm’s ownership configuration beyond the LCS, consistent

with prior governance work (Sur, Lvina, and Magnan 2013). Finally, our research provides

insights into the relationship between governance mechanisms such as ownership and

auditing effort and suggests that they should be viewed as continuums rather than as

dichotomous constructs (i.e., family control vs. non-family control; audit vs. non-audit). In

this regard, we extend prior research about the substitutability or complementarity of

governance mechanisms—an issue that is far from resolved (Becher and Frye 2011).

                                                            
3
Following the financial crisis, European auditors have faced increasing pressures from investors, governments
and public to provide high audit quality and prevent another financial crisis (e.g., The Economist, May 26,
2018).

7
 The rest of the paper is organized as follows. The next section provides the theoretical

framework and the hypothesis. Section III describes the methodology. Section IV presents the

results, robustness tests, and additional analyses. Section V concludes the paper.

II. AUDIT FEES IN FIRMS WITH CONCENTRATED OWNERSHIP

Institutional Setting

France`s institutional setting is worth studying for several reasons. First, joint audit has been

mandatory in France since 1966, and most prior studies find that it raises audit quality by

increasing the independence and competence of auditors (e.g., Bianchi 2018; Ittonen and

Trønnes 2014; Quick 2012; Ratzinger-Sakel, Audousset-Coulier, Kettunen, and Lesage 2013;

Zerni, Haapamaki, Jarvinen, and Niemi 2012).4 More specifically, joint audit is likely to

increase auditor independence because it is more difficult for managers to convince two

auditors—rather than just one—to remain silent on any discovered problem. Both of the two

independent auditors sign the audit report and are jointly responsible for the audit opinion

provided (Article L823-2 of the Code of Commerce).5 Hence, a joint audit is likely to

increase the likelihood of detecting errors in financial statements since the second auditor is

expected to review the work of the first auditor.

Second, in France, the mandatory length of an audit contract is six years, following

which shareholders may reappoint the incumbent auditor.6 During the six years of the

engagement, audit fee negotiations take place on an annual basis. However, regulators
                                                            
4
The European Commission (EC) released a green paper in 2010 entitled “Audit Policy: Lessons from the
Crisis.” The EC proposed joint audits as a measure to reduce audit market concentration and to enhance audit
quality.
5
A professional standard (NEP-100 issued on April 10, 2007 and amended on August 3, 2011) sets the detailed
principles that govern joint audits. Among other things, it states that each auditor must execute the work needed
to allow each to be able to express an opinion of their own. Hence, they need to work in a concerted manner to
issue a single audit report.
6
The new EU directive does require auditor rotation every 10 years but, in the case of joint audits such as those
in France, that period can be extended to 24 years. (In this regard, see a document published by Deloitte:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Audit/gx-deloitte-eu-audit-legislation-
overview.pdf (last access 23 May 2020)).

8
prescribe a minimum level of audit effort.7 Consistent with the International Standard on

Auditing (ISA) 315 (International Federation of Accountants, 2020), prior evidence suggests

that long audit engagement tenure enhances an auditor`s understanding of the client’s

business, environment, and internal controls, and therefore improves audit quality (Johnson et

al. 2002; Stanley and DeZoort 2007).8 A six-year engagement also decreases client pressure

since the auditor cannot be dismissed in the short term (vs. the United States, where

engagement is an annual process).9 Long audit tenure also reduces the risk and threat of

lowballing. For instance, Lee and Gu (1998) state that “the suspicion exists that lowballing

may be a predatory pricing strategy of the Big 5 certified public accounting firms, unfair to

smaller firms, and ultimately undesirable for society.” Hence, this study considers audit fees

in the French context to be a more reliable proxy for audit effort than in other countries with

more frequent auditor turnover and instances of fee negotiations.

Third, unlike the situation prevailing in the United States and in the United Kingdom,

France’s regulations restrict the provision of non-audit services by audit firms to their clients

(André, Broye, Pong, and Schatt 2016).10 Most databases (e.g., Worldscope) provide total

fees paid to auditors without a breakdown between audit and non-audit services. Therefore,

the majority of prior cross-country studies compare total fees. It also means that, in the

French context, our audit fees measure is more precise than in other countries as it is not
                                                            
7
Audit fees are determined freely between the auditor and the audited entity and are formalized in a letter of
engagement (NEP-210). The national agency of public auditors, the Compagnie nationale des commissaires aux
comptes (CNCC), sets professional practice standards for public audits which have the status of a government
decree. In this regard, the CNCC sets a minimum number of audit hours in order for the auditor to ensure an
acceptable level of audit quality (https://www.cncc.fr/la-reglementation.html; retrieved July 9, 2018).
8
In this regard, a recent study with PCAOB data shows no evidence of a decline in audit quality over a five-year
tenure cycle, thus providing little support for the view that a long tenure compromises auditor independence
(Gipper, Hail, and Leuz 2017).
9
Johnson et al. (2002, 642) argue that the auditor may “employ less effort or be more accommodating to the
client in the early years of an engagement in an attempt to limit losses on the current engagement and to ensure a
repeat engagement.”
10
  Data from the AMF (the French equivalent of the US Securities and Exchange Commission) show that non-
audit service fees represent less than 6% of total audit fees in large French firms:
https://www.amf-france.org/Publications/Rapports-etudes-et-analyses/Societes-cotees-et-operations-
financieres?docId=workspace%3A%2F%2FSpacesStore%2Ff3808891-9db8-4b9a-aedf-6b53206aef50 (last
access 22 June 2019).  

9
plagued by non-audit fees. Also, audit fees are likely to be a reliable proxy of audit effort in

France because of low litigation risk (Wingate 1997) and reduced related fee premium

(Simunic 1980).

Finally, France offers a rich institutional context to study how ownership

concentration, especially family control, affects auditing. Prior research typically portrays

France as a weak investor protection country where shareholders have incentives to hold

large equity stakes to solve managerial agency problems (La Porta et al. 1999). However, this

situation leads to higher ownership concentration, raising the likelihood of agency problems

between controlling and non-controlling shareholders (La Porta et al. 1999). Moreover,

family-controlled businesses represent a major segment of the French economy, a situation

that prevails around the world, even in the United States (Claessens, Djankov, and Lang

2000; Ernst & Young 2017; Franks, Mayer, Volpin, and Wagner 2011). Controlling families,

while sharing the same economic interests as other owners, have unique objectives that can

lead to a diversion of firm resources to family members, exacerbating the principal-principal

agency problem (e.g., Sur et al. 2013). Overall, the combination of weak investor protection,

the use of joint audits, and the six-year audit mandate in France enhances auditors’ role in

mitigating the principal-principal agency problem, which is potentially acute in family-

controlled firms.

Audit Fees in Firms with Concentrated Ownership

Most prior research on the principal-principal conflict focuses on the tension between the

LCS and non-controlling shareholders, without taking into account the potential role that

MLS beyond the controlling owner can play in mitigating or exacerbating such conflicts (e.g.,

Claessens et al. 2000, 2002; Cronqvist and Nilsson 2003; Fan and Wong 2002, 2005).

However, ownership structures with MLS are pervasive around the world. For instance, Cai

10
et al. (2016) and Laeven and Levine (2008) report that about a third of Chinese and European

publicly listed firms have MLS, respectively. Attig et al. (2008) show that 44 percent of their

sample firms from East Asia and West Europe have at least one large shareholder beyond the

LCS. Ben-Nasr et al. (2015) show that MLS are present in 34 percent of French publicly

listed firms. Even in the United States, Konijn, Kräussl, and Lucas (2011) show that

ownership structures with MLS are quite common.

MLS have the incentives and power to play a role that can shape the principal-

principal agency problem and significantly alter the governance of a firm with an LCS. In this

respect, two contrasting views coexist. On the one hand, it is possible that blockholders

collude against other shareholders when it is difficult for one single shareholder to control the

firm (Bennedsen and Wolfenzon 2000). Because corporate policy results from interaction

among shareholders in controlled firms, colluding with the LCS can make it easier for MLS

to direct a firm’s orientation and strategy. Consequently, they can expropriate other

shareholders (Zwiebel 1995) or gain access to critical information held by the LCS that

would not be available otherwise (Cheng, Lin, and Wei 2013). There is some limited

empirical evidence that such collusion can take place and is potentially detrimental to non-

controlling shareholders. However, such evidence is either dated (United States 1997–2002:

Wang 2017) or occurs in very specific settings that lack comparability (China 2003–2011:

Cai et al. 2016; private firms in Norway: Hope, Langli, and Thomas 2012).

On the other hand, there are three substantive conceptual and empirical arguments to

support the view that MLS enhance a firm’s governance, benefit non-controlling

shareholders, and potentially lead to a reduction in audit effort and fees (Laeven and Levine

2008; Mishra 2011). First, due to their substantial investment in the firm, MLS are likely to

suffer more than smaller shareholders from activities that harm shareholder wealth (Cai et al.

11
2016). MLS have the incentives and means to monitor both management and the LCS in case

their interests are threatened. In this regard, prior theoretical research shows that MLS can

enhance governance, either by forming coalitions with other large equity holders to monitor

the LCS (Bennedsen and Wolfenzon 2000) or by competing for corporate control (Pagano

and Roëll 1998). Empirical evidence does suggest that MLS effectively monitor the LCS

through the curbing of private benefits and the reduction in information asymmetry. For

instance, Mishra (2011) finds that the power and presence of MLS improve internal

governance by promoting an optimal, non-conservative investment policy that benefits all

shareholders. In contrast, in the absence of MLS, the LCS has the power and incentives to

extract private benefits of control by adopting conservative investment policies. Attig, El

Ghoul, Guedhami, and Rizeanu (2013) find that the presence of MLS with an even

distribution of voting rights is associated with higher valuation of the firms’ cash holdings,

especially when the LCS is a family. The authors conclude that an LCS’s control

contestability improves the quality of firm governance. These results are consistent with

Maury and Pajuste (2005) who find that less variance in the distribution of votes among large

blockholders improves corporate governance and, ultimately, a firm’s valuation. Similarly, El

Ghoul, Guedhami, Lennox, and Pittman (2018) empirically show that firms with MLS exhibit

a lower demand for Big 4 auditors, implying that MLS play a valuable internal monitoring

role that reduces the benefits of external monitoring by a Big 4 auditor. Barroso-Casado et

al. (2016), for their part, find that more governance mechanisms are adopted when there are

two or more large shareholders in place.

Second, prior studies find that the presence of MLS attenuates the controlling

shareholder’s expropriation and also reduces his/her preference for less bank monitoring, thus

leading to higher dividends, shorter debt maturity, and greater bank debt reliance. Such

effects suggest that MLS engage in a monitoring role that enhances corporate governance

12
(Ben-Nasr et al. 2015; Boubaker, Rouatbi, and Saffar 2017; Faccio, Lang, and Young 2001;

Jiang, Cai, Wang, and Zhu 2018). Consistent with these findings, we expect that the presence

of MLS is likely to reduce the expropriation risk of non-controlling shareholders by the LCS

and, consequently, to induce auditors to decrease their audit effort and fees.

Third, the governance role of MLS rests also on their access to private information.

Indeed, private information channels available to MLS alert them earlier about potential

misbehavior and allow them to take countervailing actions that hold in check expropriation

attempts made by corporate insiders. Attig, Guedhami, and Mishra (2008) show that the

presence of MLS lessens information asymmetry and alleviates agency costs, thus reducing

the cost of equity capital. Edmans and Manso (2011) argue that MLS decrease the potential

extraction of private benefits through their role as informed traders. By trading on private

information, blockholders move the stock price toward fundamental value by impounding

more information into prices. In cases where managers or the LCS extract private benefits

from the company, blockholders follow the so-called Wall Street Rule by “voting with their

feet” and selling their shares to liquidity traders. More recently, Jiang et al. (2018) find that

the presence of MLS is associated with better investment efficiency, suggesting that they

alleviate a firm’s agency costs and information asymmetry.

Overall, we consider that, through their monitoring and information gathering, MLS

reduce the potential for consumption of private benefits by the LCS (Baroso-Casado et al.

2016; Edmans and Holderness 2017). Such misbehavior can take different forms, including

related party transactions, the appointment of obedient executives, excessive executive

compensation, asset sales, contracts such as transfer pricing advantageous to the controlling

shareholder, loan guarantees, and the expropriation of corporate opportunities (Cai et al.

2016; Johnson et al. 2000). Many of these operations must be reported in the financial

statements and, thus, fall within the scope of auditors’ work. Consequently, in firms with

13
MLS, auditors face less audit risk in performing their role as an enforcement mechanism in

the production of credible accounting information (Francis, Khurana, and Pereira 2003).

Thus, they are likely to provide less audit effort and, ultimately, to charge lower audit fees.

This line of reasoning leads us to propose the following hypothesis.

Hypothesis: MLS are associated with lower audit fees.

III. METHODOLOGY

Sample Selection and Data Source

As in Hope et al. (2012), this study focuses on a single country setting, i.e., France, to control

for the legal environment and for cross-country variation in audit practices and fees.

Magnan (2008) does observe that there are important institutional differences across

countries, especially with respect to auditing, that can affect the conclusions of cross-country

studies.

The initial sample consists of all French listed firms appearing in the Worldscope

database over the 2003‒2013 period. We exclude from the sample: (1) financial firms with

SIC codes between 6000 and 6999; (2) firms with missing or incomplete ownership or

financial data; (3) firms with less than two usable observations during the sample period; and

(4) non–family-controlled firms. The final sample includes 2,028 firm-year observations

representing 295 family-controlled firms. Table 1 details the sample attrition.

***Insert Table 1 about here***

To select our sample of family-controlled firms, we use the procedure pioneered by

Claessens et al. (2000; 2002) and Faccio and Lang (2002) and extensively adopted by many

others. For each listed firm, we start by determining the largest direct owner at the 10 percent

threshold, i.e., the largest shareholder who directly owns at least 10 percent of the voting

14
rights. Second, we identify the latter’s largest direct owner, and we repeat this procedure until

we identify a family as the largest direct controlling shareholder. We consider this family as

the LCS of the firm. Consistent with prior research, we define a family as an individual

owner or a group of individual owners linked by marriage or blood ties (e.g., Claessens et al.

2002; Faccio and Lang 2002). Family ownership equals the total ownership of all family

members. Ownership and voting data are hand-collected from firms’ annual reports and

sources such as Lexis-Nexis, Bulletin des Annonces Légales Obligatoires (an official registry

of corporate announcements), and firm websites. Financial data are obtained from

Worldscope.

Appendix 1 summarizes the definitions and data sources for all variables used in our

analysis while Table 2 presents the distribution of our sample firms across industries and

years. The services and consumer durables industries dominate our sample with, respectively,

23.57 percent and 18.05 percent of the total firm-year observations. Table 2 also shows that

the firm-year observations are evenly distributed across the study period.

***Insert Table 2 about here***

Model Specification

We use the following regression model to test our hypothesis (firm and year subscripts are

dropped for notational convenience):

LNFEE = α0 + α1 VARMLS + α2 EXCESS_CONTROL + α3 SIZE + α4 INTSALES + α5 INVREC

+ α6 LEVERAGE + α7 BIG4 + α8 ROA + α9 BTM + α10 NBS + α11 LOSS + α12 CURRATIO + α13

FISYREND + α14 CROSSLIST + Industry dummies + Year dummies + ɛ (1)

Dependent variable: Consistent with prior research (Hay, Knechel, and Wong 2006), LNFEE

equals the natural logarithm of audit fees.

15
Key independent variables: VARMLS is one of the five MLS-related variables: MLSD,

MLSN, VR234, VRRATIO, or HERFINDAHL. To avoid multicollinearity, we include in our

model each of these variables, one at a time, all of which are measured consistently with prior

studies (Attig, El Ghoul, and Ghedhami 2009; Ben-Nasr et al. 2015, Boubaker et al. 2017:

Maury and Pajuste 2005). These variables capture different attributes of MLS (Attig et al.

2009; Ben-Nasr et al. 2015). MLSD is a dummy variable that equals 1 if at least one large

shareholder other than the LCS controls more than 10 percent of the firm, and 0 otherwise.

MLSN represents the number of MLS up to the fourth shareholder11. Consistent with our

hypothesis, we expect negative coefficients for MLSD and MLSN. We further extend our

analysis into the impact of control contestability on audit fees. VR234 is the sum of voting

rights held by the second, third, and fourth largest blockholders, and VRRATIO is the ratio of

VR234 over the LCS’s voting rights. Hence, VRRATIO reflects the potential contestability of

the LCS’s voting power by MLS, which implies lower agency costs and lower audit fees.

Consistent with our hypothesis, we expect a negative coefficient for both VR234 and

VRRATIO. Finally, to investigate how control dispersion among large shareholders shapes the

governance role of MLS and affects audit fees, we use the variable HERFINDAHL, defined

as the Herfindahl index of the differences between the voting rights (VR) of the four largest

shareholders:

HERFINDAHL = (VR1 − VR2)2 + (VR2 − VR3)2 + (VR3 − VR4)2 (2)

Higher values of HERFINDAHL imply less dispersed voting rights among the four largest

blockholders. Typically, a high HERFINDAHL value indicates a large difference between the

voting rights of the controlling owner and the second (and other) largest shareholder(s),

implying low contestability of the LCS’ control. This situation potentially reduces MLS’s

                                                            
11
 No firm in our sample has more than four large shareholders at the 10 percent threshold.
 

16
incentives to monitor the LCS (Attig et al. 2009). Consistent with our hypothesis, we expect a

positive effect of the variable HERFINDAHL on audit fees.

Control Variables: Our audit fees model includes three types of control variables: (1) a proxy

for the separation between control and cash flow rights of the LCS (EXCESS CONTROL); (2)

audit costs, as proxied by firm size (SIZE) and firm complexity (through several variables);

and (3) the auditor’s risk of future losses (through several variables) (Francis 1984; Hay et al.

2006; Simunic 1980).

EXCESS CONTROL is defined as the ultimate control rights (UCO) of the LCS in

excess of ultimate cash flow rights (UCF), all divided by ultimate control rights (i.e., (UCO–

UCF)/UCO). Appendix 2 figuratively explains the computation of EXCESS CONTROL. We

use EXCESS CONTROL as a control variable for two key reasons.12 First, EXCESS

CONTROL underlies governance in most countries around the world (e.g., Claessens et al.

2002; Faccio and Lang 2002) and increases the potential for a principal-principal agency

problem by giving the LCS greater voting rights compared to its cash flow rights (Shleifer

and Vishny 1997). Second, EXCESS CONTROL has economic implications, especially in

terms of corporate valuations and financing costs (e.g., Lin, Ma, and Xuan 2011), but also in

terms of audit fees (Fan and Wong 2005; Forst and Hettler 2019; Khalil, Magnan, and Cohen

2008). Thus, since the LCS and its voting power underlie the principal-principal agency

conflict and, potentially the governance role of MLS, we control for EXCESS CONTROL.

SIZE is proxied by the natural logarithm of total assets expressed in thousands of

euros. We use three variables to proxy for client complexity, namely, INTSALES, measured

                                                            
12
A second vote is granted by many firms in France for faithful shareholders who hold registered shares for a
period of at least two years. A study by Ernst & Young and Labrador reports that 58% of French listed firms
used double voting rights in 2013: https://www.ifa-asso.com/fr/informer/centre-de-ressources/etudes-et-
benchmark/panorama-de-la-gouvernance-ey-labrador-2013.html (last accessed February 17, 2020). For
instance, at LVMH (Louis Vuitton Moet Hennessy, the luxury goods conglomerate), Bernard Arnault and his
family hold 47% of the firm’s outstanding common shares. However, they control 63% of voting rights (LVMH
2017 Reference document, p. 291). https://r.lvmh-static.com/uploads/2018/03/lvmh_ddr_2017.pdf.

17
as the ratio of international sales to total sales; INVREC, computed as the sum of inventories

and accounts receivable, scaled by total assets; and NBS, defined as the natural logarithm of

one plus the number of business segments in which the company operates. Moreover,

following Choi, Kim, Liu, and Simunic (2009) and Simunic (1980), we control for the

auditor’s risk of future losses and include several variables. The dummy variable LOSS

equals 1 if the firm’s net income is negative, and 0 otherwise. LEVERAGE is defined as the

ratio of total debt to total assets, to measure the client-specific litigation risk potentially borne

by the auditors. ROA, return on assets, is measured as earnings before interest and taxes

divided by the book value of assets at the beginning of the fiscal year. CURRATIO is defined

as the ratio of current assets to current liabilities. CROSSLIST is a dummy variable, indicating

whether or not the firm is cross-listed in the United States, a higher-litigation risk market

(Choi et al. 2009). Finally, we include BIG_4, a proxy for audit firm size, an indicator

variable that takes the value of 1 if the firm uses one of the Big 4 auditors, and 0 otherwise.13

We use this variable to capture the Big 4 premium (Francis 1984). The model also controls

for year-end peak, FISYEND, to capture the busy season effect related to the auditor’s peak of

activity of December 31 (Hay et al. 2006). This variable equals 1 if the fiscal year-end is

December 31st, and 0 otherwise. Moreover, we control for BTM, the firm’s book-to-market

ratio. Our model also includes year and industry dummies based on Campbell’s (1996)

classification to control for time- and industry-specific effects that may affect audit pricing. 

is an error term.

                                                            
13
For robustness checks, we test two models to take into account the three possible combinations of auditors:
Big4-Big4, Big4-NonBig4 and NonBig4-NonBig4. In the first model, we include an ordinal variable BIG_4 that
takes 0, 1, and 2, respectively, if none of the Big 4 audit firms, one Big 4 audit firm, and two Big 4 audit firms
audit the firm. In the second model, we consider TWO_BIG_4, a dummy variable that equals one if the firms use
two Big 4 auditing firms, and 0 otherwise. Results (untabulated) remain qualitatively the same.

18
Descriptive Statistics

Table 3 (Panel A) presents descriptive statistics of the variables used in the analysis.14 It

shows that our sample firms pay an average (median) audit fee of 1,255 (313) thousand Euros

with standard deviation of 2,782.54 thousand Euros suggesting large variability between

firms. The level (mean, median) and standard deviation of audit fees are consistent with prior

research in France (see, e.g., André et al. 2016). Moreover, we find that MLS are present in

36.7 percent of sampled firms which is consistent with prior research (33.9 % of European

firms: Laeven and Levine 2008; 44% of East Asian and Western European firms: Attig et al.

2008; 30.7% of Chinese firms: Cai et al. 2016). Even in the United States, there is evidence

that a large proportion of public firms have multiple blockholders (Basu, Paeglis, and

Rahnamaei 2016; Konijn et al. 2011). Hence, we consider that results arising from the French

context do allow inferences about other countries.

In our subsample of firms with MLS (745 firm-year observations), the three largest

shareholders, beyond the LCS, hold together, on average (median), 26.9 (25.6) percent of a

firm’s voting rights (VR234). We also find that their average (median) power relative to the

controlling family (VRRATIO) is 86.6 (78.4). Furthermore, our sample shows a sizable gap

between control and cash flow rights held by the LCS: EXCESS CONTROL exhibits an

average of 24.4 percent, suggesting that the risk of expropriating non-controlling

shareholders is high. Furthermore, the prevalence of MLS (captured by MLSD) and the

relative power of these blockholders compared to LCS (high level of VR234 and VRRATIO)

suggest that the role of MLS in mitigating principal–principal agency problems is likely to be

crucial in our sample. Table 3 also shows that 61.9 percent of firm-year observations have at

least one Big 4 auditor (BIG_4), that the average (median) ROA is about 3.774 (4.338)

                                                            
14
All continuous variables are winsorized at the 1% and 99% threshold to mitigate the influence of outliers.

19
percent, and that only 3.5 percent of our sample firms are cross-listed in the United States

(CROSSLIST).

***Insert Table 3 about here***

Panel B of Table 3 provides comparative descriptive statistics for family-controlled

firms with and without MLS. The univariate mean comparison test results indicate that firms

with MLS pay, on average, lower audit fees (LNFEE) than firms without MLS which is a

priori consistent with our hypothesis. However, firms with MLS exhibit a slightly smaller

size (SIZE) than firms without MLS. They also exhibit a higher level of EXCESS CONTROL,

and are slightly less profitable (ROA).

Table 4 provides the Pearson pairwise correlation coefficients for all variables used in

our main regressions. As expected, the correlations between MLS-related variables are high

in absolute value, implying that they capture the same underlying construct. More

importantly, Table 4 shows that the variable LNFEE is negatively (positively) associated with

MLSD, MLSN, VR234, and VRRATIO (HERFINDAHL), lending additional preliminary

support to our hypothesis. Additionally, the other correlation coefficients appearing in

Table 4 between the control variables are small and do not exceed 0.34 in absolute value,

except for the correlation coefficient between LOSS and ROA (‒0.63), but well below the rule

of thumb threshold of 0.8 implied by prior studies (e.g., Gujarati 2004).

***Insert Table 4 about here***

IV. RESULTS

Regression Results for Audit Fees

Table 5 displays estimation results from ordinary least squares (OLS) regressions of the

natural logarithm of audit fees (LNFEE) against each of the MLS-related variables, the

20
control variables, and year and industry dummies, as per Equation (1). The t-values appear

within parentheses beneath the coefficients and are adjusted for heteroscedasticity and

clustered at the firm level to account for within-firm correlation. Table 5 shows results from

five specifications, dependent upon the version of the MLS-related variable being used

(MLSD, MLSN, VR234, VRRATIO, and HERFINDAHL). Our interpretation focuses on the

effects of MLS-related variables.

***Insert Table 5 about here***

All five regressions (specifications 1 to 5) have an adjusted R-squared of around 61

percent. There is no concern about multicollinearity as all variance inflation factors (VIF) are

lower than 2 and thus fall below the rule-of-thumb cutoff value of 10 corresponding to

potential multicollinearity problems (Neter, Wasserman, and Kunter, 1989). Focusing on

Column 1 (Table 5), the coefficient for MLSD is negative and statistically significant at the 1

percent level (−0.19003; p < 0.01), indicating that the presence of MLS is associated with

lower audit fees. This finding suggests that MLS are likely playing a monitoring role that

mitigates the principal-principal agency problem, thus decreasing audit risk and inducing

auditors to reduce their effort and fees.

In Columns 2–4 (Table 5), we include separate alternative test variables for

monitoring by MLS (MLSN, VR234, and VRRATIO). The larger the number of MLS (MLSN

in specification 2: −0.13077; p < 0.01), the greater their voting power (VR234 in specification

3: −0.52053; p < 0.01) and the greater their power compared to LCS (VRRATIO in

specification 4: −0.13408; p < 0.01), the lower the audit fees. These results are in line with

our hypothesis and suggest that auditors charge lower fees, and presumably exert lower

effort, in the presence of a LCS with greater power contestability.

21
 In Column 5, we test the influence of control dispersion among large shareholders on

firms’ audit fees by including the Herfindahl index of the differences between the voting

rights of the four largest shareholders (HERFINDAHL). The coefficient for HERFINDAHL is

significantly positive (0.06405; p < 0.01), which is consistent with our prior results on the

other MLS variables. Auditors seem to appreciate greater parity among blockholders’ voting

rights and respond to it by decreasing their audit fees. Such evidence is similar to earlier

findings by Attig et al.’s (2013) and Ben-Nasr et al. (2015) that less (greater) parity in voting

rights among a firm’s blockholders undermines (improves) corporate governance.

Considering control variables, we observe that their coefficient signs are mostly

consistent with prior audit fee literature. For instance, we find a positive relation (p < 0.010)

between audit fees and EXCESS CONTROL across all specifications (1–5), corroborating the

results of Forst and Hettler (2019) and Khalil et al. (2008). This finding seems to confirm the

idea that auditors consider family controlled firms with a large control-ownership wedge as

more vulnerable to the principal-principal agency problem and, thus, charge higher fees to

compensate for their additional effort. In addition, across all five regression models, we find a

positive and statistically significant effect of firm size (SIZE)15, complexity (INTSALES,

NBS), and the presence of a Big 4 auditor on audit fees. In addition, audit fees are negatively

associated with firm performance (ROA), current ratio (CURRATIO), and book-to-market

ratio (BTM).
                                                            
15
The literature shows firm size as the most important explanatory variable for audit fees and that the natural
logarithm of firm size does not capture the complete picture of how important size is in explaining audit fees. In
particular, any firm characteristic that is highly correlated with firm size could be significant in explaining audit
fees. We assess the importance of this concern to our data in several ways. First, we rerun our regressions
without firm size as a control variable. Second, we replace the natural logarithm of firm size by the firm’s size
decile where we assign firms to their decile in size ranking to reduce potential correlation with other firm
characteristics. Firms in the first (last) decile are the smallest (largest). Third, we rerun our regressions by
adding SIZE² to the regression to capture any potential quadratic relationship. Finally, we rerun our regressions
after orthogonalizing all the MLS variables for firm size (i.e., removing from the MLS variables all the variance
that is related to firm size so that they do not carry any firm size effect). This last approach was also repeated for
all independent variables in the model. All these approaches provide consistent results with our main findings,
suggesting that our conclusions are unlikely to be driven by firm size. We are thankful to one of the referees for
raising this concern.

22
Additional Analyses

The relationship between audit fees and MLS is robust with respect to a number of alternative

tests that consider the issue of endogeneity, alternative proxies of MLS variables, additional

control variables, period sample concern, and alternative sample compositions.

First, we address endogeneity concerns using both instrumental variable regressions

and a propensity score matching procedure (PSM). Following prior studies, we believe that

audit client firms are not randomly assigned to auditors and may be affected by the client

firm’s specific characteristics or private information (Chaney, Jeter, and Shivakumar 2004;

Ho and Kang 2013). Table 6 present the results of instrumental variable regressions. In

Columns 1 and 2, we consider the case when the key independent variable is MLSD. We start

by using the procedure developed by Adams, Almeida, and Ferreira (2009) for the case where

the endogenous variable is an indicator variable. This procedure consists of the following

three stages: i) we estimate a probit model of MLSD on the instrument IV_VR234 and the

control variables used in Equation (1) to obtain the fitted probabilities p̂ . The idea is to use at

least one valid instrument for MLS in this probit estimation. Thus, we use the variable

IV_VR234, defined as the industry average of the variable VR234 (see, e.g., Ben-Nasr et al.

2015); ii) we regress MLSD on p̂ and the control variables; and iii) we regress LNFEE on the

fitted values of the second stage (MLSD_fitted_1) and our set of control variables. Results of

the third stage of this procedure (Column 1 of Table 6) are qualitatively similar to those

reported in Table 5 and confirm that audit fees decrease with the presence of MLS. This latter

finding is consistent with the view that MLS play a stronger governance role in firms with

higher expropriation likelihood.

***Insert Table 6 about here***

23
 Columns 2 to 6 of Table 6 report the first and second stages of instrumental variable

regressions using the instruments IV_MLSD, IV_MLSN, IV_VR234, IV_VRRATIO, and

IV_HERFINDAHL, defined as the industry average of the variables MLSD, MLSN, VR234,

VRRATIO, and HERFINDAHL, respectively (see, e.g., Ben-Nasr et al. 2015; Boubaker et al.

2017; Jiang et al. 2018). The first-stage regressions use, as regressors, each one of these

instruments separately and the set of control variables from Equation (1). For purposes of

brevity, Table 6 only displays the first-stage regression results for the five instruments. The

positive and significant coefficients of IV_MLSD, IV_MLSN, IV_VR234, IV_VRRATIO, and

IV_HERFINDAHL, the F-tests of excluded instruments, the Shea Partial R², and the

Kleibergen-Paap LM statistic clearly support the choice of our instruments. To obtain the

second-stage regression results, we then regress LNFEE against the fitted values of our five

MLS variables (MLSD_fitted, MLSN_fitted, VR234_fitted, VRRATIO_fitted, and

HERFINDAHL_fitted) obtained from the first-stage regressions separately. Results

consistently show a significantly negative relationship between the presence and power of

MLS and audit fees, providing additional support to our hypothesis.

Furthermore, we employ a propensity score-matching procedure to match each family

firm with MLS with a firm without MLS based on their propensities to have more than one

large shareholder for a given year and industry (Dehejia and Wahba 2002; Rosenbaum and

Rubin 1983). This procedure allows us to identify a subset of firms without MLS that have

similar characteristics to those with MLS as a way to minimize the possibility of self-

selection bias (Dehejia and Wahba 2002). The PSM procedure yields a sample that includes

1,490 firm-year observations (745 with MLS and 745 without MLS). To estimate the

propensity scores, we run the following probit model inspired by the works of Boubaker et

al. (2017), Demsetz and Lehn (1985) and Faccio, Marchica, and Mura (2011) that identifies

the determinants of MLS presence:

24
MLSD = γ0 + α1 SIZE + γ2 AGE + γ3 LEVERAGE + γ4 FCF + γ5 ASSET_TANGIBILITY
+ Industry dummies + Year dummies + u (3)

where AGE is the number of years since the firm’s incorporation, FCF is the firm’s free cash

flows, and ASSET_TANGIBILITY is net property, plant, and equipment divided by total

assets. Our results using the propensity score matched sample (untabulated) remain

unchanged and consistent with our expectation, confirming a negative relationship between

audit fees and the presence, number, and voting power of MLS.

Second, we use alternative proxies of MLS variables to assess the robustness of our

main findings. For instance, we introduce a contestability control variable (SHAPLEY1) to

measure the power of LCS compared to the MLS. This variable represents the Shapley value

solution for the LCS in a four-shareholder voting game (Maury and Pajuste 2005).16 A lower

value of SHAPLEY1 translates into higher LCS contestability. Our results (untabulated)

indicate a positive and significant relation between SHAPLEY1 and audit fees, suggesting that

higher (lower) audit fees likely reflect lower (higher) contestability of LCS and an increased

(reduced) principal-principal conflict. Alternatively, we consider a model that includes a

contestability index defined as the common factor extracted from a principal component

analysis of our MLS variables: MLSD, MLSN, VR234, VRRATIO, and HERFINDAHL

(PCA_index). Our findings (untabulated) are consistent with those presented in Table 5 and

suggest that auditors are sensitive to principal-principal agency conflicts.

Third, we test the validity of our results to the inclusion of a number of additional

control variables in Table 7: ultimate cash flow rights of the largest shareholder (UCF);

                                                            
16
We use the definition of Maury and Pajuste (2005, 1832) “Another measure of contestability used in our study
is the Shapley value, which is the probability that a particular shareholder is pivotal in forming a majority
coalition (more than 50% of the votes). To calculate the Shapley value, the three largest blockholders are treated
as individual players, while the rest are treated as an ‘ocean,’ for whom the Shapley value is the continuous
version for oceanic games (Milnor and Shapley 1978). If the largest block holds more than 50% of the votes, the
Shapley value is equal to one. If the largest block does not hold a majority, the contestability of the largest
shareholders’ power increases with lower Shapley values.”

25
pyramid control (PYRAMID); IFRS adoption (IFRS), and new stock issuance (ISSUE). Our

conclusions remain qualitatively unaffected with the coefficients for MLSD being negative (p

< 0.01) in Columns 1 to 4. We perform this regression also on the other MLS variables and

find qualitatively similar results (untabulated).

***Insert Table 7 about here***

Given that the global financial crisis occurred in the 2003–2013 period, the level of

audit fees could be affected by this large economic downturn. Therefore, we examine the

robustness of the results by splitting the sample period between pre-crisis (2003‒2007) and

post-crisis (2010‒2013) subperiods. Our results remain consistent with those reported in

Table 5 (untabulated), indicating that the financial crisis does not have a noticeable effect on

the relation between the presence and power of MLS and audit fees. However, it must be

pointed out that the crisis lasted much longer in Europe (especially in France), than in North

America. In fact, France’s per capita GDP did not re-attain its 2008 level until 2016.

We consider alternative sample compositions to alleviate the concern about sample

selection bias. Our main analyses focus only on family-controlled firms. In Table 8,

specification 1, we enlarge our sample to all firms that have a controlling shareholder17 and

observe findings similar to our initial conclusions (as reported in Table 5). For these firms,

the presence of MLS, in addition to a LCS, is associated with lower audit fees (coefficient for

MLSD: −0.14417; p < 0.01).

In Table 8, specification 2, we replicate the analysis after eliminating firms controlled

through a pyramid. Holding a firm through successive intermediate holding entities

dramatically exacerbates the separation of control and cash flow rights of the ultimate owner,

                                                            
17
A controlling shareholder can be a family, the State, a widely held firm, or a financial institution.

26
giving him or her higher incentives to extract private benefits (Boubaker, Mansali, and Rjiba

2014). Inferences remain unchanged (coefficient for MLSD: −0.28381; p < 0.01).

***Insert Table 8 about here*** 

Finally, our main finding, namely, that MLS are associated with lower audit fees, is

consistent with the corporate governance role of MLS. To shed further light on this result, we

examine whether this effect is more pronounced in firms with high potential principal-

principal agency problem as measured by the disproportionate control of the LCS and free

cash flow. In Table 9, we adapt our model and include two interaction terms to capture

possible joint countervailing effects between the presence of MLS and (1) excess control

(EXCESS CONTROL), and (2) the presence of MLS and free cash flow (FCF).

The results of estimating these two models are in Table 9. First, in columns 1 and 2 of

Table 9, the coefficients for MLSD_fitted are statistically negative, consistent with our

hypothesis. Similar to prior research (Forst and Hettler 2019; Khalil et al. 2008), we find that

EXCESS CONTROL is positively associated with audit fees, suggesting higher audit fees in

firms with higher principal-principal agency conflicts. In Column 1, consistent with our

expectation, the estimated coefficient on EXCESS CONTROL×MLSD_fitted is negative and

statistically significant at the 1 percent level. Thus, the effect of MLS on audit fees appears to

be more pronounced for firms with more severe agency problems. Additionally, this result is

in line with MLS playing a governance role in mitigating principal–principal agency costs,

ultimately reducing audit risk and effort.

Moreover, regression results in Column 2 of Table 9 show a positive and significant

coefficient for FCF. Indeed, high free cash flow provides controlling families more

incentives to divert corporate resources and leads to higher fees to compensate auditors for

27
additional effort. More importantly, we find a negative and statistically significant coefficient

for the interaction term FCF×MLSD_fitted, lending further support to the idea that the effect

of MLS on audit fees is intensified by the severity of the principal-principal agency problem.

***Insert Table 9 about here***

V. CONCLUSION

This paper provides evidence that having multiple large shareholders (MLS) beyond

the largest controlling shareholder (LCS) reduces the level of audit fees paid by family-

controlled firms. Using a sample of listed family-controlled firms in France over the 2003–

2013 period, our findings support the idea that auditors view MLS as performing a

monitoring role over the controlling family. More specifically, it appears that auditors expect

MLS to mitigate the likelihood that LCS diverts corporate resources to the detriment of non-

controlling shareholders. By performing such a monitoring role, MLS reduce auditors’ risk

exposure and, ultimately, lead them to reduce their efforts and fees. Auditors’ reactions to the

presence of MLS are hence consistent with ISA 315 which requires auditors to assess the

risks of financial misreporting through a better understanding of the entity being audited,

especially in terms of its ownership and governance processes.

Focusing on the French context may limit the generalizability of our findings to other

economies that are characterized by strong investor protection and, potentially, a smaller

number of closely held firms (La Porta et al. 1999). However, we consider that France

provides an opportunity to further assess the relation between auditing and corporate

ownership structures. For instance, despite Simunic’s (1980) suggestion that audit fees are a

function of audit effort and fee premium due to litigation risk, most prior research relies on

audit fees as a proxy for audit effort, disregarding the litigation risk premium component

(e.g., Blankley, Hartt and MacGregor, 2014). With its low litigation risk (Wingate 1997), a

28
six-year audit mandate, and other existing regulations, France provides a setting in which

audit fees are likely to be a reliable proxy of audit effort. Consequently, we consider that

France’s institutional context with respect to external audits allows for a more precise

assessment of auditors’ responses when facing a principal-principal agency conflict situation,

as reflected in their audit effort. Moreover, France is widely viewed as providing weak legal

and institutional protection environment to non-controlling shareholders, thus increasing the

likelihood that LCS engage in expropriation activities (La Porta et al. 1998). Furthermore,

ownership concentration is especially high among listed French firms (Faccio and Lang

2002), with controlling families often being involved in management (Trébucq 2007). As a

result, the role of MLS in mitigating principal–principal agency problems is likely to be

crucial in the French context (Fattoum-Guedri, Guedri, and Delmar 2018). This may not be

the case in other countries, such as the United States, where investor protection is high and

ownership is dispersed. However, even in the United States, corporate ownership may be

more closely-held than what is widely assumed (Holderness 2009). Our intuition is that the

presence of large shareholders beyond the controlling shareholder acts as a monitoring

mechanism which, in turn, leads auditors to reduce the scope of their audit and, hence, their

audit fees.

Our results contribute to the literature on the principal-principal agency problem as

well as on the determination of audit fees. Previous studies focus either on widely held firms

or on firms with a single controlling owner. However, dichotomizing corporate governance in

such a way is controversial. Prior evidence shows that firms with MLS are widespread (e.g.,

Attig et al. 2013; Barroso-Casado et al. 2016; Cai et al. 2016). Moreover, there is ambiguity

regarding the governance role of MLS (Attig et al. 2008).

29
 While the focus on French family-controlled firms is a potential limitation, it does

allow for conclusions about how various governance mechanisms such as the LCS, MLS, and

auditing interact within a context characterized by poor investor protection. France is also

representative of most countries around the world in terms of its ownership configuration

(e.g., La Porta et al. 1999). While the sample period is another potential limitation, we

consider that focusing on ultimate ownership data that are hand collected provides unique

insights.

Future research may further investigate the role of auditors in family-controlled firms.

In particular, issues such as how auditors interface with governance mechanisms such as the

audit committee of a family-controlled firm and how they explicitly address principal-

principal agency problems are of potential interest. The means by which external monitors

such as non-family blockholders potentially mitigate principal-principal agency conflicts in

the context of family-controlled firms also constitute another research avenue. Finally, further

research can consider the impact of various regulations on the principal-principal agency

problem and the roles that auditors can play in this regard.

30
 APPENDIX 1
Variable definitions and data sources
Variable name Variable definition Source

Dependent variable

LNFEE The natural logarithm of audit fees in thousands of euros. Worldscope

Test variables
MLSD A dummy variable that equals 1 if the firm has at least two large shareholders (at Annual reports and authors’
the 10% threshold), and 0 otherwise. calculations
MLSN The number of large shareholders (up to four) As above
VR234 The sum of voting rights of the second, third, and fourth largest shareholders. As above
VRRATIO The sum of voting rights of the second, third, and fourth largest blockholders, As above
divided by the voting rights of the largest shareholder.
HERFINDAHL The sum of squared differences between the voting rights of the four largest As above
shareholders, i.e., (VR1 − VR2)² + (VR2 − VR3)² + (VR3 − VR4)², where VR1,
VR2, VR3, and VR4 equal the voting rights of the first, second, third, and fourth
largest shareholders.

Control variables
EXCESS The difference between the ultimate owner’s control rights and cash flow rights Annual reports and authors’
CONTROL (at the 10% threshold), divided by his or her control rights. calculations
SIZE The natural logarithm of total assets in thousands of euros. Worldscope
INTSALES The ratio of international sales divided by total sales. As above
INVREC The sum of inventories and accounts receivable scaled by total assets. As above
LEVERAGE The ratio of total debt divided by total assets. As above
BIG_4 A dummy variable that equals 1 if the firm is audited by at least one Big 4 audit As above
firm, and 0 otherwise.
ROA The ratio of earnings before interest and taxes divided by the book value of As above
assets at the beginning of the fiscal year.
BTM The book-to-market ratio. As above
NBS The natural logarithm of the firm’s number of business segments + 1. As above
LOSS A dummy variable that equals 1 if the firm reports a net loss in year t (i.e., As above
negative net income after taxes before extraordinary items and taxes on
extraordinary items), and 0 otherwise.
CURRATIO The ratio of current assets to current liabilities at the end of the fiscal year. As above
FISYREND A dummy variable that equals 1 if the fiscal year-end is December 31, and 0 As above
otherwise.
CROSSLIST A dummy variable that equals 1 if the firm is cross-listed in the United States in Bank of New York
year t, and 0 otherwise
UCF The ultimate percentage of cash flow rights owned by the controlling Annual reports and authors’
shareholder. calculations
PYRAMID A dummy variable that equals 1 if the firm is controlled through a pyramid Annual reports and authors’
structure, and 0 otherwise. calculations
IFRS A dummy variable that equals 1 if the firm’s financial statements are prepared Annual reports and authors’
according to IFRS, and 0 otherwise. calculations
ISSUE A dummy variable that equals 1 if the firm has issued equity during the year, and Annual reports and authors’
0 otherwise. calculations
FCF The firm’s free cash flow divided by total assets. Worldscope

31
 APPENDIX 2
Illustration: Computation of ultimate cash flow rights, control rights, and excess control. 

 
Family
 
 
 
O Family,
  Somarel = V Family, Somarel = 62.9%

  Somarel S.A.
O Family, Publicis = 5.62%;
 
V Family, Publicis= 9.12%
 
 O Somarel, Publicis = 22.4%
 V Somarel, Publicis = 36.37%
 
 
  Publicis

 
O family, Somarel = Ownership right of the Family in Somarel S.A.
V family, Somarel = Voting right of the Family in Somarel S.A.

Appendix 2 provides a simplified illustration of the ultimate ownership patterns of Publicis Group S.A., a large
media and advertising group (Source: Publicis annual reports and reference documents 2000-2003). Publicis
largest direct shareholder is Somarel S.A. (unlisted firm), which holds 22.40% of the ownership rights and
36.37% of the voting rights. The largest direct shareholder of Somarel S.A. is the Bleustein-Blanchet family who
owns 62.9 percent of the ownership and voting rights. This percentage is the sum of ownership and voting rights
of four family members. Members of the Bleustein-Blanchet family have also a direct 5.62 percent ownership
(and 9.12% voting rights) stake in Publicis. Hence, the family controls Publicis through direct and indirect
participation:
Chain 1: The family – Publicis
Chain 2: The family – Somarel S.A. – Publicis
The family’s ultimate cash flow rights (UCF) in Publicis is the sum of products of ownership rights along the
two ownership chains, that is, 62.90%×22.40%+5.62% = 19.71% and the family’s ultimate control rights (UCO)
in Publicis is the sum of weakest links along the two control chains, that is, Min (62.90%; 36.37%)+9.12% =
45.49%. Therefore, the excess control of the family is EXCESS CONTROL Family, Publicis = (UCO – UCF) / UCO =
(45.49% ‒ 19.71%) / 45.49% = 56.67%.

32
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 TABLE 1
Sample selection process

Firm-year
Sample selection process
observations
All French listed firms with available data on Worldscope for the 2003‒2013 period 8,301
Sample after deleting financial firms 6,907
Sample after excluding observations with missing governance data 5,459
Sample after excluding firms with missing or incomplete financial data and firms with less than
2,862
two usable observations during the sample period.
Sample after excluding non-family-controlled firms (final sample). 2,028

37
 TABLE 2
Distribution of sample firms across industries and years
Total
Industry
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Number per Percentage
(SIC codes)
industry of total
Petroleum
0 0 0 0 0 1 1 1 1 1 1 6 0.30
(13, 29)
Consumer durables
16 22 34 41 42 39 38 35 35 35 29 366 18.05
(25, 30, 36, 37, 50, 55, 57)
Basic industry
14 17 24 27 24 22 21 17 18 18 16 218 10.75
(10, 12, 14, 24, 26, 28, 33)
Food and tobacco
5 7 12 14 14 12 13 12 12 12 12 125 6.16
(1, 2, 9, 20, 21, 54)
Construction
6 7 10 11 9 8 10 9 9 9 8 96 4.73
(15, 16, 17, 32, 52)
Capital goods
13 15 20 23 24 25 26 26 27 28 24 251 12.38
(34, 35, 38)
Transportation
3 4 4 4 4 5 6 6 6 7 6 55 2.71
(40, 41, 42, 44, 45, 47)
Utilities
(46, 48, 49) 2 4 9 12 10 10 11 11 11 11 10 101 4.98
Textiles and trade
14 16 22 24 22 21 22 19 19 19 15 213 10.50
(22, 23, 31, 51, 53, 56, 59)
Services
41 47 54 52 49 41 39 38 41 40 36 478 23.57
(72, 73, 75, 76, 80, 82, 87, 89)
Leisure
9 14 13 10 12 11 12 9 10 10 9 119 5.87
(27, 58, 70, 78, 79)
Total number per year 123 153 202 218 210 195 199 183 189 190 166 2,028
Percentage of total 6.07 7.54 9.96 10.75 10.36 9.62 9.81 9.02 9.32 9.37 8.19 100.00
This table shows the distribution of the sample firm-year observations across industries and years. Our sample comprises a panel of 2,028 firm-year observations over the 2003–2013 period. We
use Campbell (1996) to classify firms into eleven industries. The industries are petroleum (SIC 13, 29), consumer durables (SIC 25, 30, 36, 37, 50, 55, 57), basic industry (SIC 10, 12, 14, 24, 26,
28, 33), food and tobacco (SIC 1, 2, 9, 20, 21, 54), construction (SIC 15, 16, 17, 32, 52), capital goods (SIC 34, 35, 38), transportation (SIC 40, 41, 42, 44, 45, 47), utilities (SIC 46, 48, 49),
textiles and trade (SIC 22, 23, 31, 51, 53, 56, 59), services (SIC 72, 73, 75, 76, 80, 82, 87, 89) and leisure (SIC 27, 58, 70, 78, 79).

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 TABLE 3
Panel A: Summary statistics
Standard
Variables N Mean 25th percentile 75th percentile
deviation Median
Dependent variable
LNFEE 2,028 5.872 1.552 4.854 5.746 6.818
AUDIT FEES (€ thousands) 2,028 1,255.50 2,782.54 128.30 313.00 914.39
Ownership variables
MLSD (N(MLSD=1) = 745) 2,028 0.367 0.482 0.000 0.000 1.000
MLSN 2,028 0.453 0.660 0.000 0.000 1.000
MLSN 745 1.230 0.478 1.000 1.000 1.000
VR234 745 0.269 0.097 0.200 0.256 0.345
VRRATIO 2,028 0.415 0.516 0.000 0.198 0.626
VRRATIO 745 0.866 0.536 0.413 0.784 1.175
HERFINDAHL 2,028 0.258 0.238 0.047 0.183 0.426
Voting rights 2nd 745 0.184 0.082 0.120 0.161 0.225
Voting rights 3rd 140 0.145 0.033 0.119 0.139 0.172
Voting rights 4th 20 0.119 0.012 0.110 0.121 0.129
VR1 – VR2 745 0.228 0.212 0.042 0.167 0.402
SHAPLEY1 2,028 0.712 0.368 0.327 1.000 1.000
Control variables
EXCESS CONTROL 2,028 0.244 0.209 0.074 0.219 0.365
UCO 2,028 0.407 0.200 0.247 0.361 0.562
SIZE 2,028 12.589 2.133 11.109 12.372 13.899
INTSALES 2,028 0.394 0.271 0.153 0.383 0.585
INVREC 2,028 0.418 0.180 0.288 0.422 0.543
LEVERAGE 2,028 0.225 0.165 0.090 0.208 0.328
BIG_4 2,028 0.619 0.486 0.000 1.000 1.000
ROA 2,028 3.774 7.477 1.645 4.338 7.369
BTM 2,028 0.860 0.415 0.601 0.815 1.028
NBS 2,028 1.563 0.390 1.386 1.609 1.946
LOSS 2,028 0.189 0.392 0.000 0.000 0.000
CURRATIO 2,028 1.563 0.777 1.060 1.371 1.841
FISYREND 2,028 0.784 0.412 1.000 1.000 1.000
CROSSLIST 2,028 0.035 0.184 0.000 0.000 0.000
Additional control variables
UCF 2,028 0.394 0.238 0.195 0.382 0.567
PYRAMID 2,028 0.322 0.468 0.000 0.000 1.000
IFRS 2,028 0.864 0.343 1.000 1.000 1.000
ISSUE 2,028 0.056 0.229 0.000 0.000 0.000
FCF 2,028 0.006 0.072 -0.019 0.013 0.045

This table shows descriptive statistics for the ownership structure variables and firm characteristics used in our empirical
analysis. LNFEE is the natural logarithm of audit fees in thousands of euros. MLSD is a dummy variable that equals 1 if the firm
has at least two large shareholders (at the 10% threshold), and 0 otherwise. MLSN is the number of large shareholders up to four.
VR234 is the sum of voting rights of the second, third, and fourth largest shareholders. VRRATIO is the sum of voting rights of
the second, third and fourth largest blockholders divided by the voting rights of the largest shareholder. HERFINDAHL is the
sum of the squared differences between the voting rights of the four largest shareholders, that is, (VR1−VR2)² + (VR2−VR3)² +
(VR3−VR4)²; where VR1, VR2, VR3, and VR4 equal the voting rights of the first, second, third, and fourth largest shareholders.
SHAPLEY1 is the solution for the largest shareholder in a voting game, where the four largest shareholders (MLS) are individual
players and the rest are considered as an “ocean” (Milnor and Shapley, 1978). This means that the Shapley value is the
probability that one of the shareholders is pivotal when voting on the firm’s decisions. Voting rights 2nd, Voting rights 3rd, and
Voting rights 4th, are the voting rights of the second, third, and fourth largest shareholders, respectively. VR1–VR2, is the
difference in voting rights between the largest and the second largest shareholders. EXCESS CONTROL is the difference between
the ultimate owner’s control rights and cash–flow rights (at the 10% threshold), all divided by his or her control rights. UCO is
the ultimate owner’s control rights at the 10% threshold. SIZE is the natural logarithm of total assets in thousands of euros.
INTSALES equals international sales divided by total sales. INVREC is computed as the sum of inventories and accounts
receivable scaled by total assets. LEVERAGE equals total debt divided by total assets. BIG_4 is a dummy variable that equals 1 if
the firm uses one of the Big 4 auditing firms or their forerunners, and 0 otherwise. ROA is the firm’s return on assets defined as

39
earnings before interest and taxes divided by the book value of assets at the beginning of the fiscal year. BTM is the book–to–
market ratio. NBS equals the natural logarithm of the firm’s number of business segments + 1. LOSS is a dummy variable that
equals 1 if the firm reports a net loss (i.e, a negative net income after taxes before extraordinary items and taxes on extraordinary
items), and 0 otherwise. CURRATIO is the firms’ current ratio, which equals the ratio of current assets to current liabilities at the
end of the fiscal year. FISYREND is a dummy variable that equals 1 if the fiscal year–end is December 31, and 0 otherwise.
CROSSLIST is a dummy variable that equals 1 if the firm is cross–listed in the US in year t, and 0 otherwise. UCF is the ultimate
% of cash flow rights owned by the controlling shareholder. PYRAMID is a dummy variable that equals 1 if the firm is controlled
through pyramiding, and 0 otherwise. IFRS is a dummy variable indicating that a firm’s financial statements are prepared
according to IFRS (1) or not (0). ISSUE is a dummy variable taking a value of 1 if a firm has issued equity during the year, and 0
otherwise. FCF is the firm’s free cash flow divided by total assets. All continuous variables are winsorized at the 1st and 99th
percentiles.

Panel B: Comparative descriptive statistics between family-controlled firms with and without MLS
Family–controlled Family–controlled
Firms with MLS Firms without MLS T–test of
Variable
Mean Standard Mean Standard (B) – (A)
N N
(A) deviation (B) deviation
LNFEE 745 5.527 1.504 1,283 6.072 1.545 7.731***
EXCESS CONTROL 745 0.281 0.225 1,283 0.223 0.197 –6.074***
UCO 745 0.407 0.200 1,283 0.552 0.259 13.134***
SIZE 745 12.098 2.091 1,283 12.873 2.106 8.011***
INTSALES 745 0.373 0.268 1,283 0.406 0.273 2.583***
INVREC 745 0.424 0.191 1,283 0.415 0.174 –1.08
LEVERAGE 745 0.214 0.177 1,283 0.232 0.157 2.391**
BIG_4 745 0.619 0.486 1,283 0.620 0.486 0.038
ROA 745 3.349 9.039 1,283 4.020 6.389 1.949*
BTM 745 0.780 0.370 1,283 0.907 0.432 6.710***
NBS 745 1.485 0.375 1,283 1.608 0.392 6.890***
LOSS 745 0.252 0.435 1,283 0.153 0.360 –5.557***
CURRATIO 745 1.575 0.758 1,283 1.557 0.788 –0.503
FISYREND 745 0.793 0.405 1,283 0.779 0.415 –0.772
CROSSLIST 745 0.017 0.131 1,283 0.045 0.208 3.286***
UCF 745 0.306 0.185 1,283 0.444 0.250 13.103***
PYRAMID 745 0.322 0.468 1,283 0.323 0.468 0.025
IFRS 745 0.852 0.355 1,283 0.871 0.336 1.156
ISSUE 745 0.063 0.243 1,283 0.051 0.221 –1.102
FCF 745 0.003 0.085 1,283 0.008 0.064 1.439
Panel B (Table 3) reports the results of a pairwise comparison of means of the natural logarithm of audit fees in thousands of
euros between groups of family–controlled firms with MLS and without MLS using t-tests of means. All variables in the table are
defined in Appendix 1. The p-value of the t-test of equality is reported in the last column of the table. ***, ** and * denote
statistical significance at the 1%, 5%, and 10% levels, respectively.

40
 TABLE 4
Correlation matrix

Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

1-LNFEE 1.00
2-MLSD –0.17*** 1.00
3-MLSN –0.17*** 0.89*** 1.00
4-VR234 –0.14*** 0.79 ***
0.82*** 1.00
*** ***
5-VRRATIO –0.09 0.66 0.72*** 0.81*** 1.00
6-HERFINDAHL 0.08*** –0.43*** –0.42*** –0.55*** –0.59*** 1.00
*** *** *** *** ***
7-EXCESS CONT. 0.19 0.13 0.15 0.14 0.22 –0.28*** 1.00
***
8-SIZE 0.72 –0.17*** –0.18*** –0.16*** –0.11*** –0.00 0.17*** 1.00
*** *** *** **
9-INTSALES 0.31 –0.05 –0.05 –0.05 –0.03 –0.01 0.01 0.31*** 1.00
*** ** ** *** ***
10-INVREC –0.28 0.02 0.05 0.04 –0.02 0.10 –0.07 –0.34*** –0.10*** 1.00
*** ** *** ***
11-LEVERAGE 0.12 –0.05 0.00 0.00 0.02 0.02 0.10 0.21 0.02 –0.09*** 1.00
*** ** *** *** *** *** ***
12-BIG_4 0.22 –0.00 –0.01 0.05 0.09 –0.16 0.13 0.26 0.12 –0.10*** 0.07*** 1.00
*** ** * *** *** *** *** *** *** ***
13-ROA 0.09 –0.05 –0.04 –0.07 –0.10 0.07 –0.00 0.12 0.11 –0.06 –0.19 0.03 1.00
14-BTM 0.01 –0.14*** –0.10*** –0.13*** –0.09*** 0.12*** –0.04* 0.02 –0.10*** 0.02 0.10*** –0.02 –0.17*** 1.00
15-NBS 0.31*** –0.15 ***
–0.12 ***
–0.18 ***
–0.16 ***
0.07 ***
0.06 ***
0.33 ***
0.11 ***
–0.11 ***
0.05 **
0.11 ***
0.09 ***
0.07*** 1.00
*** *** *** *** *** *** *** *** *** *** ***
16-LOSS –0.15 0.12 0.11 0.12 0.13 –0.12 0.00 –0.21 –0.07 0.06 0.17 –0.02 –0.63 0.12*** –0.06*** 1.00
***
17-CURRATIO –0.19 0.01 0.01 –0.04* –0.03* 0.07*** –0.13*** –0.21*** 0.13*** 0.12*** –0.33*** –0.06*** 0.17*** –0.03 –0.10*** –0.10*** 1.00
*** * * ** ***
18-FISYREND 0.03 0.01 –0.01 0.01 0.00 –0.10 0.04 0.04 –0.05 –0.06 0.01 –0.02 –0.05 0.00 0.02 –0.01 –0.05** 1.00
*** *** *** *** *** ** *** *** *** ***
19-CROSSLIST 0.17 –0.07 –0.06 –0.07 –0.03 –0.09 0.04 0.26 0.10 –0.16 0.01 –0.00 –0.01 –0.02 0.12 –0.01 –0.05** 0.04* 1.00
This table reports Pearson pairwise correlation coefficients for all the variables used in our main regressions. LNFEE is the natural logarithm of audit fees in thousands of euros. MLSD is a dummy variable that equals 1 if the
firm has at least two large shareholders (at the 10% threshold), and 0 otherwise. MLSN is the number of large shareholders up to four. VR234 is the sum of voting rights of the second, third, and fourth largest shareholders.
VRRATIO is the sum of voting rights of the second, third, and fourth largest blockholders divided by the voting rights of the largest shareholder. HERFINDAHL is the sum of the squared differences between the voting rights
of the four largest shareholders, that is, (VR1 − VR2)² + (VR2 − VR3)² + (VR3 − VR4)²; where VR1, VR2, VR3, and VR4 equal the voting rights of the first, second, third, and fourth largest shareholders. EXCESS CONTROL is
the difference between the ultimate owner’s control rights and cash flow rights (at the 10% threshold), all divided by his or her control rights. SIZE is the natural logarithm of total assets in thousands of euros. INTSALES
equals the international sales divided by total sales. INVREC is computed as the sum of inventories and accounts receivable scaled by total assets. LEVERAGE equals total debt divided by total assets. BIG_4 is a dummy
variable that equals 1 if the firm uses one of the Big 4 auditing firms or their forerunners, and 0 otherwise. ROA is the firm’s return on assets, defined as earnings before interest and taxes divided by the book value of assets at
the beginning of the fiscal year. BTM is the book-to-market ratio. NBS equals the natural logarithm of the firm’s number of business segments + 1. LOSS is a dummy variable that equals 1 if the firm reports a net loss (i.e, a
negative net income after taxes before extraordinary items and taxes on extraordinary items), and 0 otherwise. CURRATIO is the firms’ current ratio, which equals the ratio of current assets to current liabilities at the end of
the fiscal year. FISYREND is a dummy variable that equals 1 if the fiscal year-end is December 31, and 0 otherwise. CROSSLIST is a dummy variable that equals 1 if the firm is cross-listed in the US in year t, and 0 otherwise.
All continuous variables are winsorized at the 1st and 99th percentiles. The superscript asterisks ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.

41
 TABLE 5
The effect of MLS on audit fees
Variable Expected Sign (1) (2) (3) (4) (5)
MLSD (−) −0.19003***
(−3.7586)
MLSN (−) −0.13077***
(−3.6587)
VR234 (−) −0.52053***
(−2.8346)
VRRATIO (−) −0.13408***
(−3.0207)
HERFINDAHL (+) 0.06405***
(2.6552)
EXCESS CONTROL (+) 0.46155*** 0.46403*** 0.43863*** 0.46539*** 0.40413***
(3.7629) (3.7609) (3.5252) (3.6786) (3.2346)
SIZE (+) 0.44477*** 0.44289*** 0.44608*** 0.44669*** 0.44972***
(19.8234) (19.5962) (19.8185) (19.8127) (20.1569)
INTSALES (+) 0.62941*** 0.62871*** 0.62788*** 0.62657*** 0.62766***
(6.7400) (6.7222) (6.7085) (6.7013) (6.7048)
INVREC (+) 0.00537 0.01265 0.01155 −0.01684 −0.00213
(0.0352) (0.0827) (0.0751) (−0.1091) (−0.0139)
LEVERAGE (−) −0.30087* −0.26282 −0.26858 −0.25720 −0.26031
(−1.8258) (−1.6023) (−1.6340) (−1.5726) (−1.5960)
BIG_4 (+) 0.10599** 0.10485** 0.11338** 0.11642** 0.10876**
(2.2538) (2.2287) (2.4048) (2.4451) (2.2960)
ROA (−) −0.00611* −0.00597* −0.00643** −0.00672** −0.00658**
(−1.9013) (−1.8493) (−1.9995) (−2.1037) (−2.0627)
BTM (−) −0.23916*** −0.22976*** −0.23057*** −0.22469*** −0.21346***
(−4.2752) (−4.1190) (−4.1554) (−4.0419) (−3.8713)
NBS (+) 0.31696*** 0.32552*** 0.31937*** 0.32086*** 0.34322***
(4.7790) (4.9369) (4.7887) (4.8649) (5.2211)
LOSS (+) −0.08601 −0.09140 −0.10050 −0.10086 −0.11439
(−1.1357) (−1.2111) (−1.3340) (−1.3394) (−1.5321)
CURRATIO (−) −0.07933** −0.07842** −0.08311** −0.07887** −0.07695**
(−2.2488) (−2.2152) (−2.3210) (−2.2240) (−2.1679)
FISYREND (+) −0.02775 −0.03342 −0.02959 −0.03404 −0.03094
(−0.4861) (−0.5861) (−0.5186) (−0.5953) (−0.5426)
CROSSLIST (+) −0.13408 −0.12438 −0.12406 −0.11534 −0.10732
(−0.7256) (−0.6728) (−0.6727) (−0.6237) (−0.5761)
Intercept −1.58174*** −1.66693*** −1.68576*** −1.72583*** −1.92642***
(−5.1168) (−5.5920) (−5.5094) (−5.7523) (−6.8874)
Year dummies Yes Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes Yes
Sample size 2,028 2,028 2,028 2,028 2,028
Adjusted R² 0.6083 0.6080 0.6068 0.6069 0.6057
F statistic 54.14*** 52.20*** 50.67*** 52.49*** 49.45***
Mean VIF (Maximum VIF) 1.27 (1.79) 1.27 (1.78) 1.28 (1.78) 1.28 (1.78) 1.26 (1.77)
This table presents regression results for the impact of MLS on audit fees. The dependent variable is LNFEE, defined as the natural logarithm of
audit fees in thousands of euros. Five specifications are considered. MLSD is a dummy variable that equals 1 if the firm has at least two large
shareholders (at the 10% threshold), and 0 otherwise. MLSN is the number of large shareholders, up to four. VR234 is the sum of the voting rights
of the second, third, and fourth largest shareholders. VRRATIO is the sum of the voting rights of the second, third, and fourth largest blockholders
divided by the voting rights of the largest shareholder. HERFINDAHL is the sum of the squared differences between the voting rights of the four
largest shareholders, that is, (VR1 − VR2)² + (VR2 − VR3)² + (VR3 − VR4)²; where VR1, VR2, VR3, and VR4 equal the voting rights of the first,
second, third, and fourth largest shareholders. EXCESS CONTROL is the difference between the ultimate owner’s control rights and cash flow
rights (at the 10% threshold), all divided by his or her control rights. SIZE is the natural logarithm of total assets in thousands of euros. INTSALES
equals the international sales divided by total sales. INVREC is computed as the sum of inventories and accounts receivable scaled by total assets.
LEVERAGE equals total debt divided by total assets. BIG_4 is a dummy variable that equals 1 if the firm uses one of the Big 4 auditing firms or
their forerunners, and 0 otherwise. ROA is the firm’s return on assets, defined as earnings before interest and taxes divided by the book value of
assets at the beginning of the fiscal year. BTM is the book-to-market ratio. NBS equals the natural logarithm of the firm’s number of business
segments + 1. LOSS is a dummy variable that equals 1 if the firm reports a net loss (i.e, a negative net income after taxes before extraordinary
items and taxes on extraordinary items), and 0 otherwise. CURRATIO is the firms’ current ratio, which equals the ratio of current assets to current
liabilities at the end of the fiscal year. FISYREND is a dummy variable that equals 1 if the fiscal year-end is December 31, and 0 otherwise.
CROSSLIST is a dummy variable that equals 1 if the firm is cross-listed in the United States in year t, and 0 otherwise. All continuous variables
are winsorized at the 1st and 99th percentiles. The t-values based on White’s (1980) heteroscedasticity-consistent standard errors are in
parentheses beneath the coefficient estimates. The superscript asterisks ***, ** and * denote statistical significance at the 1%, 5% and 10%
levels, respectively.

42
 TABLE 6
The effect of MLS on audit fees after controlling for potential endogeneity 
IV regressions
Variable Expected Sign
(1) (2) (3) (4) (5) (6)
MLSD_fitted_1 (−) −0.67492**
(−2.0218)
MLSD_fitted (−) −0.34266**
(−1.9979)
MLSN_fitted (−) −0.25580**
(−2.0983)
VR234_fitted (−) −1.19910**
(−1.9890)
VRRATIO_fitted (−) −0.65130**
(−2.0446)
HERFINDAHL _fitted (+) 0.32604**
(2.0308)
EXCESS CONTROL (+) 0.61905*** 0.49400*** 0.46572*** 0.47697*** 0.73100*** 0.38434***
(3.3818) (3.6156) (3.5585) (3.4089) (3.3146) (2.8093)
SIZE (+) 0.43240*** 0.44243*** 0.44271*** 0.44259*** 0.43426*** 0.45081***
(16.7705) (19.5691) (19.1206) (18.7715) (18.0223) (20.3415)
INTSALES (+) 0.62209*** 0.61788*** 0.62875*** 0.61554*** 0.61137*** 0.62677***
(6.6043) (6.6569) (6.7772) (6.5978) (6.3733) (6.7464)
INVREC (+) 0.00782 0.00905 0.01280 0.02286 −0.10149 0.00965
(0.0507) (0.0600) (0.0844) (0.1491) (−0.6257) (0.0622)
LEVERAGE (−) −0.42295** −0.34427** −0.26297 −0.29221* −0.26844 −0.25459
(−2.2244) (−2.0016) (−1.6171) (−1.7438) (−1.5833) (−1.5786)
BIG_4 (+) 0.10905** 0.10093** 0.10493** 0.12026** 0.16573*** 0.09834*
(2.3079) (2.1623) (2.2481) (2.4455) (2.7967) (1.8141)
ROA (−) −0.00538 −0.00606* −0.00595* −0.00660** −0.00788** −0.00646**
(−1.6343) (−1.8766) (−1.8457) (−2.0372) (−2.3140) (−2.0352)
BTM (−) −0.31292*** −0.26093*** −0.23022*** −0.25602*** −0.28141*** −0.20780***
(−4.1492) (−4.1158) (−4.1688) (−4.1829) (−4.1407) (−3.6913)
NBS (+) 0.25033*** 0.29051*** 0.32519*** 0.28456*** 0.23927*** 0.33861***
(3.1457) (4.1844) (5.0307) (4.1291) (3.0335) (5.1558)
LOSS (+) −0.00982 −0.06645 −0.09078 −0.08352 −0.03909 −0.12028
(−0.1029) (−0.8271) (−1.1989) (−1.0780) (−0.4527) (−1.6000)
CURRATIO (−) −0.08719** −0.08389** −0.07844** −0.09353** −0.08723** −0.07772**
(−2.4080) (−2.4007) (−2.2335) (−2.5440) (−2.4246) (−2.1951)
FISYREND (+) −0.00883 −0.01975 −0.03340 −0.02084 −0.03123 −0.03524
(−0.1525) (−0.3476) (−0.5912) (−0.3704) (−0.5316) (−0.6110)
CROSSLIST (+) −0.08076 −0.04783 −0.12459 −0.03417 −0.01433 −0.11845
(−0.4367) (−0.2656) (−0.6805) (−0.1935) (−0.0798) (−0.6338)
Intercept −0.03441 0.61952* 0.45835 0.63090 0.86389** 0.29152
(−0.0653) (1.6802) (1.3644) (1.5980) (2.0367) (0.9019)
Year dummies Yes Yes Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes Yes Yes
Sample size 2,028 2,028 2,028 2,028 2,028 2,028
Adjusted R² 0.6069 0.6078 0.6080 0.6060 0.5828 0.6048

43
 TABLE 6
Continued
First−stage regressions
IV_MLSD 1.05763***
(21.96)
IV_MLSN 0.73999***
(20.95)
IV_VR234 0.64151***
(11.10)
IV_VRRATIO 0.80333***
(6.27)
IV_ HERFINDAHL 0.80291***
(10.76)
Shea’s partial R2 0.0856 0.0732 0.0518 0.0184 0.0341
F−test of excluded instruments 482.2257*** 438.70*** 123.2904*** 39.3005*** 115.74***
102.5895 114.4560 25.9929 30.3970 93.7338
Kleibergen−Paap LM statistic: Underidentification test
(p < 0.01) (p < 0.01) (p < 0.01) (p < 0.01) (p < 0.01)
Correlation (Instrument; Endogenous) 0.3612*** 0.4997*** 0.3209*** 0.2990*** 0.2479***
Correlation (Instrument; LNFEE) −0.0361 −0.0214 −0.0239 −0.0360 −0.0336
Correlation (Endogenous; LNFEE) −0.1664*** −0.1715*** −0.1418*** −0.0849*** 0.0813***
This table presents instrumental variable regressions using Adams et al.’s (2009) method when the endogenous variable is a dummy (Column 1 and a
2SLS approach using the IV_MLSD, IV_MLSN, IV_VR234, IV_VRRATIO and IV_ HERFINDAHL computed as the industry averages of the variables
MLSD, MLSN, VR234, VRRATIO and HERFINDAHL, respectively, as instruments (Columns 2‒6). The dependent variable is LNFEE, defined as the
natural logarithm of audit fees in thousands of euros. MLSD is a dummy variable that equals 1 if the firm has at least two large shareholders (at the
10% threshold), and 0 otherwise. MLSN is the number of large shareholders up to four. VR234 is the sum of voting rights of the second, third, and
fourth largest shareholders. VRRATIO is the sum of voting rights of the second, third, and fourth largest blockholders divided by the voting rights of
the largest shareholder. HERFINDAHL is the sum of the squared differences between the voting rights of the four largest shareholders, that is, (VR1
− VR2)² + (VR2 − VR3)² + (VR3 − VR4)²; where VR1, VR2, VR3, and VR4 equal the voting rights of the first, second-, third, and fourth largest
shareholders. EXCESS CONTROL is the difference between the ultimate owner’s control rights and cash flow rights (at the 10% threshold), all
divided by his or her control rights. SIZE is the natural logarithm of total assets in thousands of euros. INTSALES equals the international sales
divided by total sales. INVREC is computed as the sum of inventories and accounts receivable scaled by total assets. LEVERAGE equals total debt
divided by total assets. BIG_4 is a dummy variable that equals 1 if the firm uses one of the Big 4 auditing firms or their forerunners, and 0 otherwise.
ROA is the firm’s return on assets, defined as earnings before interest and taxes divided by the book value of assets at the beginning of the fiscal
year. BTM is the book-to-market ratio. NBS equals to the natural logarithm of the firm’s number of business segments + 1. LOSS is a dummy
variable that equals 1 if the firm reports a net loss (i.e, a negative net income after taxes before extraordinary items and taxes on extraordinary items),
and 0 otherwise. CURRATIO is the firms’ current ratio, which equals the ratio of current assets to current liabilities at the end of the fiscal year.
FISYREND is a dummy variable that equals 1 if the fiscal year-end is December 31, and 0 otherwise. CROSSLIST is a dummy variable that equals 1
if the firm is cross-listed in the United States in year t, and 0 otherwise. All continuous variables are winsorized at the 1st and 99th percentiles. The t-
values based on White’s (1980) heteroscedasticity-consistent standard errors are in parentheses beneath coefficient estimates. The superscript
asterisks ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.

44
 TABLE 7
Robustness tests with additional control variables
UCF PYRAMID IFRS ISSUE
Variable Expected Sign
(1) (2) (3) (4)
MLSD (-) ‒0.21460*** ‒0.18195*** ‒0.19003*** ‒0.19000***
(‒4.0467) (‒3.6024) (‒3.7586) (‒3.7563)

UCF (-) ‒0.28184**

(‒2.0446)
PYRAMID (+) 0.11553**
(2.0325)
IFRS (+) 0.58061***
(5.7784)
ISSUE (+) ‒0.01605
(‒0.1657)
Intercept and all other control variables omitted to simplify exposition of results

Year dummies Yes Yes Yes Yes

Industry dummies Yes Yes Yes Yes
Sample size 2,028 2,028 2,028 2,028
Adjusted R² 0.6091 0.6089 0.6083 0.6081
F statistic 53.40*** 52.65*** 54.14*** 52.51***
This table presents a set of sensitivity tests as a robustness check of our results. The dependent variable is LNFEE,
defined as the natural logarithm of audit fees in thousands of euros. MLSD is a dummy variable that equals 1 if the
firm has at least two large shareholders (at the 10% threshold), and 0 otherwise. UCF is the ultimate percentage of
cash flow rights owned by the controlling shareholder. PYRAMID is a dummy variable that equals 1 if the firm is
controlled through pyramiding, and 0 otherwise. IFRS is a dummy variable indicating that equals 1 if the firm’s
financial statements are prepared according to IFRS, and 0 otherwise. ISSUE is a dummy variable that takes 1 if a
firm has issued equity during the year, and 0 otherwise. All continuous variables are winsorized at the 1st and 99th
percentiles. The t-values based on White’s (1980) heteroscedasticity-consistent standard errors are in parentheses
beneath coefficient estimates. The superscript asterisks ***, ** and * denote statistical significance at the 1%, 5%
and 10% levels, respectively.

45
 TABLE 8
Analyses using alternative samples
CLOSELY HELD EXCLUDING
Expected FIRMS PYRAMID FIRMS
Variable
Sign
(1) (2)
MLSD (-) −0.14417*** −0.28381***
(−3.2922) (−4.4413)

Intercept and all other control variables omitted to simplify exposition of results.

Year dummies Yes Yes

Industry dummies Yes Yes
Sample size 2,636 1,356
Adjusted R² 0.64 0.56
F statistic 50.40*** 29.72***
The dependent variable LNFEE is the natural logarithm of audit fees in thousands of euros.
Column 1 presents regression results for the impact of MLS on audit fees using 2,636 family
and non-family closely held firms. Column 2 repeats the analysis after excluding all firms
which are controlled through pyramiding from the sample of family-controlled firms. MLSD is
a dummy variable that equals 1 if the firm has at least two large shareholders (at the 10%
threshold), and 0 otherwise. All continuous variables are winsorized at the 1st and 99th
percentiles. The t-values based on White (1980) heteroscedasticity-consistent standard errors
are in parentheses beneath the coefficient estimates. The superscript asterisks ***, ** and *
denote statistical significance at the 1%, 5% and 10% levels, respectively.

46
 TABLE 9
Additional analyses
Variable Expected Sign (1) (2)
MLSD_fitted (-) −0.32895** −0.40761**
(−1.9864) (−2.4573)
EXCESS CONTROL (+) 0.55442*** 0.52817***
(3.9561) (3.8614)
EXCESS CONTROL × MLSD_fitted (-) −1.08870**
(−1.9991)
FCF (+) 0.19929***
(5.4514)
FCF × MLSD_fitted (-) −0.42312***
(−7.5925)
Intercept and all other control variables omitted to simplify the exposition of results.
Year dummies Yes Yes
Industry dummies Yes Yes
Sample size 2,028 2,028
Adjusted R² 0.61 0.61
F statistic 52.34*** 50.11***
This table presents regression results for the impact of the severity of agency problems on the role of MLS
in determining audit fees. The dependent variable is LNFEE, defined as the natural logarithm of audit fees
in thousands of euros. EXCESS CONTROL is the difference between the ultimate owner’s control rights and
cash flow rights (at the 10% threshold), all divided by his or her control rights. FCF is the firm’s free cash
flow divided by total assets. MLSD_fitted is the fitted value of MLSD from the first-stage of the
instrumental variable regression (Table 6). EXCESS CONTROL is the difference between the ultimate
owner’s control rights and cash flow rights (at the 10% threshold), all divided by his or her control rights.
All continuous variables are winsorized at the 1st and 99th percentiles. The t-values based on White’s
(1980) heteroscedasticity-consistent standard errors are in parentheses beneath the coefficient estimates.
The superscript asterisks ***, ** and * denote statistical significance at the 1%, 5% and 10% levels,
respectively.

47

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