Gender diversity and audit fees: Insights from a principal-principal agency conflict setting

Abstract

This study delves into how the presence of female directors can impact audit fees, with specific focus on addressing the unique principal-principal agency conflict. Using a sample of Spanish non-financial companies listed on the stock exchange between 2012 and 2022, the study employs winsorization for data normalization and implements various regression techniques to achieve a thorough evaluation. Findings reveal that the inclusion of female directors leads to higher audit fees. This outcome aligns with two potential explanations: firstly, the increasing demands for audit quality driven by female directors' superior monitoring abilities, favoured by controlling owners (demand perspective); and secondly, the possibility that auditors face heightened litigation and reputational risks because of female directors being appointed as tokens or for “window dressing” purposes by controlling owners who engage in expropriation activities. Further analysis indicates that our results are primarily influenced by the demand explanation. The study highlights that the corporate governance role of female directors is more pronounced in firms where substantial disparity exists between the controlling owner's voting rights and cash flow rights, emphasizing their critical role in mitigating Type II agency conflicts. These insights underline the key role of female directors in promoting effective corporate governance through auditing, and they provide useful recommendations for policy makers and business leaders in designing governance and regulatory frameworks, particularly in environments where principal-principal agency conflicts are prominent.