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An Auditor's Perspective of Executive Incentive Pay and Dividend Payouts in Family Firms

Journal of Family and Economic Issues volume 42, pages 697–714 (2021)Cite this article

Abstract

In family firms, where the family and the business domains are intertwined, conflicts from one domain can spill over to the other. Agency conflicts in the business domain can spread to the family domain and ruin the well-being of the families. Agency theorists suggest that corporate governance tools such as performance-based incentive pay and dividend payouts can be used to mitigate agency conflicts in widely-held firms. Previous studies in family firms, however, show inconclusive results. This paper aims to investigate whether incentive pay and dividend payouts alleviate agency conflicts in family firms, from an auditor’s perspective. Audit research shows that audit fees are higher for firms (auditees) with more severe agency problems. Thus, an audit fee premium (discount) can be a proxy for the severity (mildness) of agency conflicts. If a governance tool exacerbates (mitigates) agency conflicts in a family firm, it is expected to lead to an audit fee premium (discount). Using data from 150 largest listed companies in Hong Kong, the analyses show that the impacts of incentive pay and dividend payouts on audit fees are not uniform. Auditors view the governance tools as effective in mitigating agency conflicts only in some settings. This implies that the owning families should be cautious when implementing a governance tool. In some situations, a governance tool may aggravate agency conflicts in the business domain, which then can spill over to the family domain and adversely affect the family welfare.

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Fig. 1

Notes

  1. For example, see Gerety et al. (2001) and Kato et al. (2005) for incentive pay studies; Lang and Litzenberger (1989) and Howe et al. (1992) for dividend payout studies.

  2. For the 150 firms in our sample, besides having firms operating their business in Hong Kong, we also have firms with their main business located in Mainland China, France, Italy, Russia, Taiwan, and the UK. Hence, the audit fee and financial statement items can be denominated in different currencies. If the variables in the model are not measured in the form of ratios, the dollar values of audit fees and financial statement items in different currencies are translated into US dollars using the average of the daily currency exchange rates for the year between the US dollars and the different currencies presented for the audit fees and financial statements.

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Acknowledgment

The work described in this paper was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (UGC/FDS16/B03/15).

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Authors and Affiliations

  1. School of Accounting, Curtin University, Bentley, Australia

    Pattarin Adithipyangkul

  2. Lee Shau Kee School of Business and Administration, Open University of Hong Kong, Kowloon, Hong Kong

    H. Y. Hung & T. Y. Leung

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  1. Pattarin Adithipyangkul
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Adithipyangkul, P., Hung, H.Y. & Leung, T.Y. An Auditor's Perspective of Executive Incentive Pay and Dividend Payouts in Family Firms. J Fam Econ Iss 42, 697–714 (2021). https://doi.org/10.1007/s10834-020-09729-1

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Keywords

  • Agency theory
  • Family business
  • Incentive pay
  • Dividend payout
  • Audit pricing