The purpose of this study is to investigate the corporate governance role of external audits in a setting where companies traditionally rely more on debt than equity capital. We partition the German audit market into two groups: the first group comprises the top two auditors on the basis of market share, which we classify as the dominant auditors, and the other group consists of all other auditors. We predict that a German company's demand for audit services from one of the two groups of auditors is determined by its set of stakeholders. We find a positive relation between German companies' demand for dominant audit suppliers and the variables that we use as proxies for the stakeholder interests of creditors, dispersed shareholders, and foreign suppliers. We also find a negative association between German companies' dominant audit supplier choices and the stakeholder interests of closely held companies. Our results suggest that audits play a corporate governance role conditional on companies' relations with alternative stakeholders.
