An Auditor's Perspective of Executive Incentive Pay and Dividend Payouts in Family Firms
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ORIGINAL PAPER
An Auditor’s Perspective of Executive Incentive Pay and Dividend Payouts in Family Firms Pattarin Adithipyangkul1 · H. Y. Hung2 · T. Y. Leung2 Accepted: 10 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
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. Keywords Agency theory · Family business · Incentive pay · Dividend payout · Audit pricing
Introduction It has long been established that work can interfere with family (work-to-family conflict), and family can interfere with work (family-to-work conflict) (Allen et al. 2000; Roth and David 2009). The work-family conflicts appear to be particularly prevalent in family firms. With the business (work) and family domains intertwined, family businesses have been described by researchers as “fertile environments for conflict”, with conflicts from one domain often spilling over to
* T. Y. Leung [email protected] Pattarin Adithipyangkul [email protected] H. Y. Hung [email protected] 1
School of Accounting, Curtin University, Bentley, Australia
Lee Shau Kee School of Business and Administration, Open University of Hong Kong, Kowloon, Hong Kong
2
the other domain (Großmann and Von Schlippe 2015). On the one hand, relationship conflicts within a family (e.g. sibling rivalry, marital struggle, fights over the family estates) can spill over to the business domain and destroy the business’s prospect (Kubíček and Machek 2020; Großmann and Von Schlippe 2015). On the other hand, conflicts in the business domain can spill over to the family domain and
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