Do Family Firms Purchase More Nonaudit Services than Non‐Family Firms?

Abstract

This study investigates the association between family ownership and the relative level of nonaudit service (NAS) fees paid to the incumbent auditors by public companies. Using data from S&P 1500 firms during the post-SOX period 2002–2010, the study shows that the NAS fee ratio (the NAS fees relative to the total of audit and NAS fees) is higher for family firms than non-family firms. The results suggest that family owners' close monitoring of their firms reduces the information asymmetry and agency problems between shareholders and managers, and as a result family firms tend to purchase more NAS from their auditors to appreciate the potential benefits of the auditors' knowledge spillovers. Additional analysis demonstrates that the positive association between family ownership and the NAS fee ratio is particularly pronounced for family firms without dual-class shares and for those with non-family-member CEOs.