Do Auditors Price Common Ownership?

Abstract

SUMMARY Common ownership (i.e., financial institutions’ block holding stock in industry rivals) and its implications for investors are matters of current interest and debate (Securities and Exchange Commission (SEC) 2018). Motivated by this debate and the salience of common ownership, we investigate whether and how auditors price common ownership. Consistent with the notion that common ownership improves monitoring, we find common ownership is related to lower audit fees (about 6 percent lower). Further, we find that the reduction in audit fees is more pronounced for companies whose common owners (1) have stronger incentives to monitor and (2) have “scale” in monitoring. Using path analysis, we find common ownership contributes to lower audit fees through improved earnings quality. Collectively, our findings speak to the effect of monitoring mechanisms from common ownership and are of potential interest to investors and the SEC as they attempt to assess the broader implications of common ownership. Data Availability: All data used in the paper are publicly available from sources cited in the paper. JEL Classifications: M4; M42.