The Preference for Competent Chief Audit Executives in Family Firms: Mitigating Agency Issues with Nonfamily Executives

ABSTRACT This paper examines the demand difference in chief audit executive (CAE) competence between family and nonfamily firms and whether CAE competence plays a role in mitigating the agency problems between family owners and nonfamily executives within family firms. Using a sample of Chinese firms listed on the small and medium enterprise board, we find that CAE competence is higher in family firms than nonfamily firms. The demand is more prominent when the ownership dispersion among family members is less and when the CEO is one of the family members. Moreover, family members’ financial background reinforces the social identity of CAE competence and thus increases their demand for competent CAEs. Further analysis indicates that CAE competence can mitigate agency problems between family owners and nonfamily executives by reducing perk consumption and increasing turnover-performance sensitivity, which drives the demand for CAE competence in family firms. Data Availability: All data are available from public databases identified in the paper. JEL Classifications: D19; G34; M42.