CEO Domination, Growth Opportunities, and their Impact on Audit Fees

2001 ◽  
Vol 16 (3) ◽  
pp. 189-208 ◽  
Author(s):  
Judy S. L. Tsui ◽  
Bikki Jaggi ◽  
Ferdinand A. Gul
Keyword(s):  
High Growth ◽  
Chief Executive ◽  
Audit Fees ◽  
Negative Association ◽  
Corporate Boards ◽  
Growth Opportunities ◽  
Audit Fee ◽  
Monitoring Mechanism ◽  
Growth Firms ◽  
The Relationship

This study examines the relationship between a firm's internal monitoring mechanism and its impact on the audit fee. The first hypothesis investigates whether firms with independent corporate boards (chief executive officer and chairman being separate individuals) provide a more effective internal monitoring mechanism and are thus associated with lower control risk, resulting in lower audit effort and fees as compared to nonindependent, CEO-dominated boards. The second hypothesis examines whether the effectiveness of the internal monitoring mechanism provided by independent corporate boards is independent of the firms' growth opportunities. High-growth firms are by nature more difficult to monitor due to the existence of discretionary investments and measurement problems associated with future assets. Thus, the negative association between independent corporate boards and audit fees is expected to be affected by a firm's growth. Results using 650 observations from Hong Kong companies provide support for both hypotheses.

Earnings Management, Litigation Risk, and Asymmetric Audit Fee Responses

2006 ◽  
Vol 25 (1) ◽  
pp. 85-98 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker ◽  
Gary F. Peters
Keyword(s):  
Earnings Management ◽  
High Growth ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Litigation Risk ◽  
Audit Fee ◽  
Growth Firms ◽  
Price Earnings Ratio ◽  
Year 2000 ◽  
Conservative Bias

This study examines the association between audit fees and earnings management, using publicly available fee data. We hypothesize that, due to asymmetric litigation effects, audit fees decrease (increase) with a client's risk of income-decreasing (increasing) earnings management risk. We also hypothesize that the positive relation between income-increasing earnings management risk and audit fees is heightened for clients that are high-growth firms. We test our hypotheses with a sample of 429 public, non-regulated, Big 5 audited companies, using fee data for the year 2000. We find that downward earnings management risk, as estimated by negative (i.e., income-decreasing) discretionary accruals, is associated with lower audit fees. We also document that upward earnings management risk, as estimated by positive discretionary accruals, is associated with higher audit fees and that the interaction of this risk with an industry-adjusted price-earnings ratio has an incrementally significant, positive effect on fees. We interpret our findings as consistent with a conservative bias on the part of auditors. The conservative bias arises from asymmetric litigation risk in which income-increasing discretionary accruals exhibit greater expected litigation costs than income-decreasing discretionary accruals (Simunic and Stein 1996; Palmrose and Scholz 2004; Palmrose et al. 2004; Richardson et al. 2002; Heninger 2001).

scholarly journals Leverage and investment opportunities: the effect on high growth firms

2020 ◽  
Vol 31 (83) ◽  
pp. 302-317
Author(s):  
Rossimar Laura Oliveira ◽  
Eduardo Kazuo Kayo
Keyword(s):  
Capital Structure ◽  
Inverse Relationship ◽  
Negative Relationship ◽  
High Growth ◽  
Growth Opportunities ◽  
Dynamic Panel ◽  
Industry Growth ◽  
Investment Opportunities ◽  
Growth Firms ◽  
The Relationship

ABSTRACT The objective of this paper is to investigate if the high growth of a firm results in a reduction in its debt levels. This is expected to happen for firms that experience a positive idiosyncratic shock to their growth opportunities, which would affect their cash flow and profitability. Although the relationship between growth opportunities (e.g., Tobin’s Q) and capital structure has already been widely discussed from a conceptual viewpoint, there are still important empirical gaps, particularly due to the endogeneity of the first variable. This paper seeks to minimize these problems by operationalizing the concept of idiosyncratic technological shocks. This issue is relevant because the negative relationship between growth and leverage may indicate that for the most efficient companies there will be a reduction in bankruptcy cost and a reduction in agency costs for the least efficient companies. This paper contributes to the development of studies in the area by demonstrating the inverse relationship between growth and leverage, with the model and the variable that represents the positive shocks experienced by companies. The dynamic panel method enables an analysis of the variation in debt in relation to the variation in value using the first differences and controlling the lagged debt effect. To apply the model, we used data from Brazilian companies, covering 1995 to 2016. The main results show that the greater the ratio between the firm’s growth opportunities and its industry growth opportunities, the lower its leverage indicators. The complementary results suggest that less leveraged firms have this negative relationship to an even stronger degree.

Does Growth Affect Firms’ Leverage Adjustment Speed? A Study of Indian Firms

2020 ◽  
Vol 8 (2) ◽  
pp. 139-155 ◽  
Author(s):  
Biswajit Ghose ◽  
Kailash Chandra Kabra
Keyword(s):  
High Growth ◽  
Two Dimensions ◽  
Growth Opportunities ◽  
Partial Adjustment ◽  
Partial Adjustment Model ◽  
Adjustment Speed ◽  
Growth Firms ◽  
The Impact ◽  
The Relationship

The significance of firms’ growth opportunities as one of the determinants of leverage is documented in many prior studies. But, there are not enough studies which examine the impact of growth on leverage adjustment speed. In this backdrop, the present study investigates the relationship between growth and leverage adjustment speed. Second, the study also examines the moderating role of two dimensions of target deviation, that is, nature and level of deviation in the relationship between growth and leverage adjustment speed. Using partial adjustment model on a dataset of 28,532 firm-year observations comprising 2,718 listed Indian firms with 4–12 years data for each firm, the study observes faster leverage adjustment speed for high-growth firms (36%) than low-growth firms (24%). The results also confirm the moderating effect of target deviation in the relationship between growth and adjustment speed. Overall, the study concludes that firms’ growth opportunities cause asymmetries in target adjustment speed by altering the costs and benefits of adjustment, and nature and level of target deviation moderates the relationship between growth and adjustment speed. These findings are expected to have substantial practical implications for financial managers in their capital structure decisions.

scholarly journals Kualitas Audit: Ditinjau dari Fee Audit, Risiko Audit dan Skeptisme Profesional Auditor sebagai Variabel Moderating

2020 ◽  
Vol 8 (1) ◽  
pp. 9
Author(s):  
Muslim Muslim ◽  
Syamsuri Rahim ◽  
Muhammad Faisal AR Pelu ◽  
Alma Pratiwi
Keyword(s):  
Regression Analysis ◽  
Audit Quality ◽  
Audit Fees ◽  
Public Accounting ◽  
Audit Risk ◽  
Accounting Firms ◽  
Professional Skepticism ◽  
Audit Fee ◽  
The Relationship ◽  
Positive Effect

The purpose of this study was to determine the effect of audit fees and audit risk on audit quality with auditor professional skepticism as a moderating variable. This research was conducted at 8 public accounting firms in Makassar city with 40 respondents. The analytical method used is multiple regression analysis (Moderated Regression Analysis) which is used to measure the strength of the relationship between two or more variables. The results of this study found that the audit fee variable had a negative and not significant effect on audit quality. These results illustrate that the higher the audit fee received by the auditor, the audit quality will decrease. While audit risk is not a significant positive effect on audit quality. The results of this study illustrate that the higher the audit risk, the audit quality will decrease. The auditor's professional skepticism as a moderating variable is not able to strengthen the effect of audit fees on audit quality. Furthermore, auditor professional skepticism as a moderating variable is also unable to strengthen the effect of audit risk on audit quality

scholarly journals Leverage and firm investment: the role of information asymmetry and growth

2019 ◽  
Vol 27 (1) ◽  
pp. 56-73 ◽  
Author(s):  
Albert Danso ◽  
Theophilus Lartey ◽  
Samuel Fosu ◽  
Samuel Owusu-Agyei ◽  
Moshfique Uddin
Keyword(s):  
Information Asymmetry ◽  
High Growth ◽  
Firm Investment ◽  
Financial Leverage ◽  
Content Type ◽  
Growth Firms ◽  
The Impact ◽  
The Relationship ◽  
Role Of Information

PurposeThis paper aims to demonstrate how financial leverage impacts firm investment and the extent to which this relationship is conditional on the level of information asymmetry as well as growth.Design/methodology/approachThe paper relies on data from 2,403 Indian firms during the period 1995-2014, generating a total of 19,544 firm-year observations. Analysis is conducted by using various panel econometric techniques.FindingsDrawing insights from agency theories, the paper uncovers that financial leverage is negatively and significantly related to firm investment. It is also observed that the impact of financial leverage on firm investment is significant for high information asymmetric firms. Finally, the paper shows that the relationship between leverage and firm investment is significant for low-growth firms. However, no significant relationship is found between leverage and investment for high-growth firms.Originality/valueThis paper provides fresh evidence on the leverage–investment nexus and, to the authors’ knowledge, it the first paper to examine the extent to which this leverage–investment relationship is driven by the level of information asymmetry.

The effect of managerial stock ownership on the relationship between material internal control weaknesses and audit fees

2017 ◽  
Vol 16 (2) ◽  
pp. 239-259 ◽  
Author(s):  
Santanu Mitra ◽  
Bikki Jaggi ◽  
Talal Al-Hayale
Keyword(s):  
Internal Control ◽  
Audit Fees ◽  
Stock Ownership ◽  
Managerial Ownership ◽  
Managerial Incentive ◽  
Content Type ◽  
Audit Fee ◽  
Internal Control Weaknesses ◽  
Ownership Effect ◽  
The Relationship

Purpose The purpose of the study is to examine the effect of managerial stock ownership on the relationship between material internal control weaknesses (ICW) and audit fees. Design/methodology/approach The paper uses multivariate regression analyses on a sample of 1,578 ICW and 1,578 pair-matched (based on both propensity score and managerial stock ownership) non-ICW firm observations for a period from 2004 to 2010 to investigate how managerial incentive at various stock ownership levels impacts the relationship between material ICW and audit fees. Findings For the firms with low managerial stock ownership (up to 5 per cent stockholdings), the authors find no significant effect of managerial ownership on the positive relationship between audit fees and ICW. However, the impact of managerial stock ownership on the relationship between ICW and audit fees is significantly positive when managerial ownership is medium, i.e. more than 5 per cent and less than or equal to 25 per cent stockholdings, and the managerial ownership effect is even higher when managerial stock ownership is high, i.e. more than 25 per cent stockholdings. The result is especially robust for the ICW firms with high managerial stock ownership (i.e. where managers hold more than 25 per cent equity stake in the firms). The additional analyses further show that this managerial ownership effect is more pronounced when the firms suffer from company-level material control weaknesses that have pervasive negative effect on financial reporting quality. Research limitations/implications The results imply that in a low managerial ownership firms with substantial misalignment between manager and shareholder incentives, managerial stock ownership has little effect on the ICW and audit fee relationship. But when managers’ ownership interest is at a high level, they are more prone to purchase higher-quality audit service to reduce the risk of financial misstatements due to material ICW, which results in higher audit fees. The results add to the audit fee literature by suggesting that managerial incentive at various ownership levels is a critical governance factor that impacts auditor’s fee structure especially when higher reporting risk exists due to material ICW. Originality/value Prior literature documents that there is some relationship between managerial attributes and earnings quality; however, there is no substantive empirical evidence on the effect of managerial stock ownership on audit pricing when client companies face higher risk of financial misreporting as a result of material ICW. In this study, the authors seek answers to these empirical questions and fill the gap in the literature.

scholarly journals Keterbacaan Catatan Atas Laporan Keuangan dan Dampak Audit (Readability over Financial Reporting Footnotes and Audit Outcomes)

2021 ◽  
Vol 28 (2) ◽  
pp. 53
Author(s):  
Nadiah Bella Sagitarisma ◽  
Riesanti E. Wijaya
Keyword(s):  
Regression Analysis ◽  
Financial Reporting ◽  
Generalized Least Squares ◽  
Financial Statements ◽  
Audit Fees ◽  
Analysis Method ◽  
Data Regression ◽  
Audit Fee ◽  
Relationship Of ◽  
The Relationship

This study aims to find out the relationship of readability over financial reporting footnotes and audit outcomes. Audit outcomes are projected by audit fees and audit report lag.  Researchers used data from the company's financial statements listed on IDX in 2015-2018. Researchers used purposive sampling. From the copying, researchers processed 184 company data. This study used the panel's data regression analysis method. Data processing uses Generalized - least - squares.  This research proves that the worse the readability, the lower the audit fee.  Meanwhile, the worse the readability, the more time it takes the auditor to carry out an examination of the financial statements. This phenomenon occurs because the condition of the readability of notes to financial statements in Indonesia is still at a low level.

scholarly journals FAIR VALUE OF NON-CURRENT ASSETS AND THE SECOND LARGEST OWNERSHIP ON AUDIT FEE

2018 ◽  
Vol 1 (1) ◽  
pp. 47
Author(s):  
Beriliana Hapsari ◽  
R. Nelly Nur Apandi
Keyword(s):  
Negative Impact ◽  
Positive Impact ◽  
Economic Value ◽  
Audit Fees ◽  
Fair Value ◽  
Audit Fee ◽  
Current Asset ◽  
Asset Quality ◽  
The Relationship

The use of fair value method has positive and negative impact. The positive impact of applying the fair value method is more relevant for the decision maker and shows the economic value according to the circumstances at that time. While its negative impact, can lead to manipulation and uncertainty. It takes greater effort for the auditor to assess fairness of fair non-current asset quality, resulting in increased audit fees. This study aims to determine the effect of fair value of non-current asset on the determination of audit fees and to know the multiple large shareholder moderation in the relationship between fair value of non-current asset and audit fee. Using the OLS regression, this study uses companies listed on the IDX from 2013 to 2015 with the exception of the financial sector. The result of this research indicates that fair value of non-current asset influences audit fee and this research shows that the second largest ownership can weaken the effect of fair value of non-current asset toward  audit fees.

scholarly journals Disproportionate Insider Control and the Demand for Audit Quality

2018 ◽  
Vol 38 (1) ◽  
pp. 171-191 ◽  
Author(s):  
Arno Forst ◽  
Barry R. Hettler
Keyword(s):  
Firm Value ◽  
Audit Quality ◽  
Audit Fees ◽  
Auditor Independence ◽  
Negative Association ◽  
External Monitoring ◽  
Big 4 ◽  
Cash Flow Rights ◽  
Dual Class ◽  
The Relationship

SUMMARY We examine the relationship between disproportionate insider control, enabled through dual-class share structures, and the demand for audit quality. Using a comprehensive hand-collected sample of U.S. dual-class firms, we find that, consistent with outside shareholders' increased demand for external monitoring, as well as self-bonding by entrenched insiders, disproportionate insider control is positively associated with the propensity to hire a Big 4 or industry specialist auditor, auditor independence, and audit fees. Corroborating a self-bonding explanation, additional analyses show that audit quality mitigates the negative association of disproportionate insider control and firm value. In expanded analyses, we also investigate the separate effects of insider voting and cash flow rights on the demand for audit quality in dual-class firms. Consistent with general agency theory, we find a decreased (increased) demand for audit quality from incentive-alignment (entrenchment) effects of ownership.

scholarly journals Growth opportunities and dividend policy: some evidence on the role of ethnicity in an emerging economy

2014 ◽  
Vol 12 (1) ◽  
pp. 126-138 ◽  
Author(s):  
Ravichandran K. Subramaniam ◽  
Mohammed Shaiban ◽  
Susela Devi Suppiah
Keyword(s):  
Missing Data ◽  
Dividend Policy ◽  
Selection Process ◽  
Listed Companies ◽  
Emerging Economy ◽  
Negative Association ◽  
Growth Opportunities ◽  
Market Capitalization ◽  
The Relationship

This paper examines the association between growth opportunities and dividend payouts and moderates the relationship between growth opportunities and dividend payouts. Our sample consisted of the Malaysian top 300 public listed companies (in terms of market capitalization) for a period from 2004 to 2011. Based on a specified selection process, the sample contained 1330 firm-year observations, after excluding firms with missing data. This paper finds that growth opportunities is associated with less dividends payouts and that this relationship is weaker for Bumiputera ethnic controlled firms. Furthermore, the results show that this negative association exists only for non-Government Linked Controlled firms

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