Ownership concentration, choice of auditors, and firm performance: Evidence from the MENA region

How does ownership concentration effect firm performance in emerging markets? On one hand, concentrated ownership leads to higher agency problems, and on the other hand, it minimizes agency problems by removing the free-rider problem. Using a large dataset of ownership concentration from the MENA region during the period between 2004 and 2008, we document that ownership concentration, as itself, may not have a significant impact on firm performance. It is, rather, the way concentrated firms govern themselves that determine their performance. We argue that concentrated ownership firms, being aware of the agency problems embedded in their ownership structure, appoint one of big-four auditors as their external auditor to signal the market that they are disclosing reliable information. Our results also show a significantly positive relationship between ownership concentration and the choice of auditor. We, further, show that for a given level of ownership concentration, appointing one of the big-four auditors lead to superior firm performance.