Does the presence of institutional dual holders affect audit pricing?

This study investigates whether and how the presence of creditors’ simultaneous debt and equity holdings (dual ownership) affects auditors’ risk assessment and pricing decisions. Analyzing a sample of United States public firms from 2001 to 2017, we find that firms with dual holders incur higher audit fees than those without. We posit that dual holders have incentives to strategically shape the firm’s information environment to preserve their private informational advantage (information advantage channel) and to promote specific risk-taking behaviors (incentive alignment channel). These channels increase information asymmetry between a firm and outside investor, as well as the firm’s business and audit risks. Supporting this hypothesis, our findings indicate that dual-held firms have lower earnings quality and higher litigation risks. Furthermore, we find that the positive effect of dual holdings on audit fees is attenuated when the external information environment is more transparent, and is more (less) pronounced when dual holders possess more share (debt) interest than other shareholders (debtholders). This study contributes to the literature by revealing how third-party information intermediary responds to the presence of institutional dual holders. Given the growing prevalence of institutional dual holders in international markets, our findings could be of interest to practitioners and regulators worldwide.