We analyze audit fees and audit risk to extract auditors׳ assessment of family-firm׳s financial reporting quality. Relative to non-family firms, we find that auditors charge family firms significantly less, and the fee difference shrinks in magnitude when family firms have high audit risk. Using constructs for audit risk and audit effort, we show that family firms have lower audit risk, and that their auditors work less to provide assurance. Our findings suggest that superior reporting quality lowers audit risk and the need for greater audit investments, which is why auditors charge family firms less.

This paper investigates the effectiveness of equity-based compensation in mitigating the effects of agency costs on the valuation of single-segment and multi-segment firms. In a sample of 4182 firm-year observations during the period 1993–1998, we find that firms with high equity-based compensation have higher valuation than firms with low equity-based compensation. This is true in both single-segment and multi-segment firms. The effect of equity-based compensation for multi-segment firms, where agency costs are expected to be higher, is much greater than for single-segment firms. Also, the negative value-effect of diversification is less for firms with high equity-based compensation.