Does Shareholding Heterogeneity on First Major Shareholder Incentively Affect Audit Characteristics?-Evidence FromTobacco and Non-tobacco Enterprises

Abstract

This study is to examine the effect of first major shareholders on audit characteristics, and emphasize their incentives towards corporate reform. In addition, we also emphasize on the tobacco industry that is totally state-owned by Chinese central government, as their internal audits are mainly conducted by the State Council. Methods: Taking A-share listed enterprises in Chinese Shanghai and Shenzhen Stock Exchange as samples, this paper analyzes the changes in corporate audit characteristics, which are caused by the holding heterogeneity on the first major shareholders. Then a series of endogenous and robustness tests are to confirm the baseline results. Based on the results of population, we specifically analyse and forecast the tobacco industries. Results: This positive relationship remains significant. Also, the channels for the first major shareholder to reduce non-standard audit opinions originate from their constraints and incentives, which reflect on enhanced supervision, sustainable business operation and market competition. These contribute to their revised managerial behavior. Finally, additional tests illustrate that the effect of strengthened equity is heterogeneous in terms of size, equity nature and growth stage of enterprises.Conclusion: The study domestrates the importance of equity structure and first major shareholders, which calls attention to managerial motives and behavior. The marginal effect is supposed to be shrunk in tobacco business as it is initially in absolute control by public authority. The already economic profits have made it reached favorable audit report. The enhanced shareholdings of first major shareholders could alleviate managerial myopia and moral hazard, and give the inspiration to enterprises in the reform of the ownership structure. Research limitations/implications–Effect of increasing first major shareholders’ holdings on audits is required to be applied in certain situations. However, the unavailable data and minimal samples of listed tobacco enterprises make it hard to clearly estimate the shareholding effect in this certain industry. Therefore, we have to qualitatively analyse tobacco business based on average population.Originality/value– This paper enlarges the role of major shareholders in audit characteristics, and emphasizes their managerial behavior towards audit process. The study indicates that stronger first major shareholdings tend to obtain qualified and standard audit opinions, pay higher audit fees and select high-quality auditors. The results and anlyses could enlight the tobacco and non-tobacco industries.