Do audit committees reduce the agency costs of ownership structure?

•Study the demand for and value relevance of audit committees conditional on corporate ownership.•Use China as a laboratory, where audit committees are voluntary.•Audit committees complement existing internal governance systems.•Audit committees substitute for inefficient external regulatory environments.•Audit committees are value relevant.

We investigate the agency costs of corporate ownership structure and the role of audit committees in mitigating their effect. Using China as a laboratory, where audit committees are voluntary, we study the demand for and value relevance of audit committees conditional on the various agency costs of corporate ownership. Audit committees complement existing internal governance systems by reducing the agency conflicts embedded in ownership structure. They are always value relevant, the magnitude of which depends upon the level and complexity of the ownership lattice. Audit committees substitute for inefficient external regulatory environments, particularly where weak legal institutions predominate. Our results are robust to firm size, investment level and financial leverage.