1 Executive Equity Risk-Taking Incentives and Audit Service Pricing Yangyang Chen, Monash University Ferdinand A. Gul, Monash University Madhu Veeraraghavan, Monash University Leon Zolotoy, Melbourne Business School, University of Melbourne We are grateful to Chris Armstrong, Nampuna Dolok Gultam, Teh Chee Ghee, Steven Low, C.H. Tee and seminar participants at Monash University for helpful comments and suggestions. The usual disclaimer applies.
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Executive Equity Risk-Taking Incentives and Audit Service Pricing
Yangyang Chen, Monash University
Ferdinand A. Gul, Monash University
Madhu Veeraraghavan, Monash University
Leon Zolotoy, Melbourne Business School, University of Melbourne
We are grateful to Chris Armstrong, Nampuna Dolok Gultam, Teh Chee Ghee, Steven Low,
C.H. Tee and seminar participants at Monash University for helpful comments and
suggestions. The usual disclaimer applies.
2
Executive Equity Risk-Taking Incentives and Audit Service Pricing
ABSTRACT: Using a sample of 11,120 firm-year observations for 1,873 U.S. firms
spanning the period 2000-2010, we show a positive association between the
sensitivity of CEO compensation to stock return volatility (vega) and audit fees. We
also show that the positive association between vega and audit fees is more
pronounced for firms that are susceptible to litigation risk and weakens in the post-
Sarbanes-Oxley Act (SOX) period. In supplementary tests, we show that CEO age
and power also affect the association between vega and audit fees. Collectively, our
results suggest that audit firms incorporate executive risk-taking incentives in the
In this paper we examine how auditors respond, in terms of audit fees, to risk-
taking incentives induced by CEO compensation portfolio. More specifically, we
examine whether CEO equity incentives, such as the sensitivities of CEO
compensation to stock return volatility (vega) and stock price (delta), are associated
with audit fees. We build on prior studies that argue that a higher vega is likely to
induce managers to be less risk averse and consequently engage more in financial
misreporting (Armstrong et al., 2013). The higher likelihood of financial misreporting,
in turn, is likely to affect audit risks and audit fees, ceteris paribus.
A primary motivation for our study is based on the call by the Public Company
Accounting Oversight Board (PCAOB) that auditors carefully evaluate and consider
client executive compensation practices (see PCAOB Release No. 2012-001
proposing a new auditing standard for related party transactions and amendments to
auditing standards regarding significant unusual transactions). The proposed
standard addresses three areas for auditors: (a) evaluating a company’s
identification of, accounting for, and disclosure of relationships and transactions
between the company and its related parties; (b) identifying and evaluating a
company’s accounting and disclosure of its significant unusual transactions; and
(c) obtaining an understanding of a company’s financial relationships and
transactions with its executive officers that is sufficient to identify risks of material
misstatement.
4
Our research question is motivated more specifically by the third area identified
in the release, since it requires auditors to perform procedures to obtain an
understanding of the company’s financial relationships with its executive officers.1 In
particular, PCAOB Release 2012-001 (p. 2) states that
“Incentives and pressures for executive officers to meet financial targets can
result in risks of material misstatement to a company’s financial statements.
Such incentives and pressures can be created by a company’s financial
relationships and transactions with its executive officers (e.g. executive
compensation including perquisites and any other arrangements)”.
Hence, examining the association between executive equity risk incentives and
audit fees constitutes an important step toward our understanding of the auditing
process, on the one hand, and the effect of executive compensation on the quality of
financial reporting, on the other. In addition, the use of equity-based compensation in
the form of stock and options has not only grown substantially in recent years but
has also attracted the attention of regulators (Perry and Zenner, 2000; Coles et al.,
2006; Murphy and Sandino, 2010).
Our study integrates the executive compensation literature with the audit fee
literature. Although the two literatures are rich and have generated significant debate
and research, empirical evidence linking them is almost non-existent (Wysocki,
1 Appendix 4 - Additional Discussion (p. A4-41) states that the auditor should perform procedures that include but
are not limited to (1) reading employment and compensation contracts and (2) reading proxy statements and other relevant company filings with the U.S. Securities and Exchange Commission (SEC) and other regulatory agencies that relate to the company’s financial relationships and transactions with its executive officers. Paragraph 10A of the proposed amendments to Auditing Standard No. 12 requires the auditor to perform procedures designed to identify risks of material misstatement related to the company’s financial relationships and transactions with its executive officers. Page A4-42 of PCAOB release No. 2012-001 states “understanding how a company has structured its compensation for executive officers can assist the auditor in understanding whether such compensation arrangements affect the assessment of the risks of material misstatement.” Page A4-43 of PCAOB release No. 2012-001 states that the proposed amendment requires “the auditor to consider inquiring the chair of the compensation committee or its equivalent and any compensation consultants engaged by either the compensation committee or the company regarding the structuring of the compensation for executive officers.”
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2010). In a recent paper, Wysocki (2010, pp. 155-156) notes that “fertile ground
exists for future research on the links between the two compensation literatures.”
Our intuition regarding the link between risk-taking incentives induced by CEO
compensation portfolio on audit fees is straightforward and draws on two strands of
related literature. The first strand examines the association between audit risk and
audit fees. Auditors face audit risk, the risk of failure to discover material
misreporting, which exposes audit firms to substantial litigation risk. With a total of
$5.66 billion in private litigation payments paid by U.S. audit firms over 1996–2007
(Badertscher et al., 2011), exposure to litigation risk can also lead to severe
reputational damage, substantial loss of market share, and declarations of
bankruptcy (Seetharaman et al., 2002; Hilary and Lennox, 2005; Weber et al., 2008;
Skinner and Srinivasan, 2012). Prior studies also show that auditors charge higher
audit fees from clients with lower reporting quality and a higher likelihood of financial
misreporting (Pratt and Stice, 1994; Gul et al., 2003; Bédard and Johnstone, 2004;
Hogan and Wilkins, 2008; Charles et al., 2010).
The focus of prior research in the second strand is on the relation between
financial misreporting, equity risk, and CEO compensation portfolio sensitivities.
Studies show that managers who decide to engage in financial misreporting face
substantial monetary and non-monetary risks, suggesting that the decision to
misreport will alter managers’ perceived risk of their portfolio holdings (Karpoff et al.,
2008; Armstrong et al., 2013). Prior research also provides evidence consistent with
the argument that a lower quality of financial reporting increases the reporting firm ’s
equity risk by adversely affecting transparency and increasing information
asymmetry (Hribar and Jenkins, 2004; Gray et al., 2009; Kravet and Shevlin, 2010;
Rajgopal and Venkatachalam, 2011). Consequently, CEO equity incentives can
6
encourage or discourage financial misreporting, depending on whether the expected
benefits of misreporting outweigh its effect on manager risk aversion. In particular,
since vega measures the sensitivity of CEO wealth to stock return volatility, a higher
vega is likely to induce managers to be less risk averse and, consequently,
encourage misreporting (Armstrong et al., 2013).
Taken together, the evidence provided in prior research is consistent with the
notions that (a) auditors charge higher fees from clients with lower reporting quality
and a higher likelihood of financial misreporting and (b) a higher vega encourages
misreporting. These findings suggest that auditors are expected to increase their
assessments of audit risks and charge higher fees from firms with higher vega, a
prediction that forms the basis for our main research question. We also address two
subsidiary questions: In the first question we examine how this effect varies across
firms with different levels of litigation risk, while in the second we examine whether
the vega-audit fee relation is weaker in the post-Sarbanes-Oxley Act (SOX) period.
The motivation for the first subsidiary question is that prior studies document a
positive relation between audit fees and client firm litigation risk (Seetharaman et al.,
2002; Venkatachalam, 2008; Choi et al., 2009; Kim et al., 2012). If vega reflects
managerial incentives to engage in financial misreporting, then its effect on audit
fees will depend, among other factors, on how likely the failure to detect financial
misreporting will lead to subsequent legal actions from client firm stakeholders.
Therefore, we hypothesize that the effect of vega on audit fees should be stronger
for firms that are more susceptible to litigation risk.
The motivation for the second subsidiary question is that a major purpose of
SOX is to protect investors by improving the accuracy and reliability of corporate
disclosures and to restore investor confidence in the integrity of firms’ financial
7
reporting (Lobo and Zhou, 2006). In addition, SOX directs the Securities and
Exchange Commission (SEC) to require the CEOs and CFOs of all listed firms to
certify the material accuracy and completeness of financial statements. Prior
research provides evidence consistent with SOX regulations having a positive effect
on reporting quality (Lobo and Zhou, 2006; Bartov and Cohen, 2009; Iliev, 2010). In
addition, SOX imposes significant criminal penalties on CEOs and CFOs for
certifying financial statements that do not comply with the requirements of SOX. In
short, since regulatory scrutiny and penalties for aggressive financial reporting is
greater post-SOX, we hypothesize that the positive association between vega and
audit fees is weaker in the post-SOX period.
We establish four findings. First, using a sample of 11,120 firm-year
observations for 1,873 unique U.S. firms spanning 2000-2010, we show that firms
with a high vega, on average, pay significantly higher audit fees. Specifically, we
document that increasing vega from the first to the tenth decile leads to an increase
of approximately 29% in audit fees. Second, we show that the association between
vega and audit fees is more pronounced for firms susceptible to litigation risk. Third,
we find that the association between vega and audit fees, while remaining
significant, has weakened in the post-SOX period. Finally, we document that CEO
age and power have a significant impact on the association between vega and audit
as those with long investment horizons and concentrated share holdings. Dedicated
institutional investors are shown in the prior literature (Gaspar et al., 2005;
Ramalingegowda and Yu, 2012) to be the group of institutional investors that is most
likely to monitor managers. We obtain the institutional ownership data from Thomson
Financial and the institutional investor classification from Brian Bushee’s website.5
Our final governance measure is board independence, defined as the proportion
of independent directors on the board. Prior studies show that stronger boards are
negatively associated with earnings management, restatements, and fraud and
positively associated with audit effort and earnings quality (Dechow et al., 1996;
Beasley et al., 2000; Carcello et al., 2002; Klein, 2002; Bédard et al., 2004). The
results reported in columns (4) to (7) of Table 4 are consistent with those of Carcello
et al. (2002), in that we document a positive relation between governance measures
and audit fees. After controlling for governance measures, the coefficient of
LVOLSEN remains positive and significant, suggesting that the effect of vega on
audit fees is not driven by their correlation with corporate governance.
[Insert Table 4 about here]
Changes in Business Risk
Next we investigate whether the effect of vega on audit fees remains significant
after controlling for projected changes in a firm’s business risk. Prior studies
document strong causal relation between vega and firm risk, in that a firm with a high
4
We also employed total institutional ownership and the top five institutional ownership defined as the percentage of shares held by all institutional investors and the top five institutional investors as additional measures of institutional ownership. Our findings hold. 5 See http://accounting.wharton.upenn.edu/faculty/bushee/IIclass.html.
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vega tends to implement riskier investment policies (Guay, 1999; Coles et al., 2006;
Low, 2009). Since auditing standards require auditors to gain an understanding of
client business risk to better identify areas that may create pressure on financial
reporting (Winograd et al., 2000), projected changes in business risk can potentially
affect audit fees.
To control for the effect of vega on business risk, we employ a two-step
procedure. First, we follow Coles et al. (2006) and regress measures of firm
investment policy - R&D intensity (R&D) and capital expenditure (CAPEX) - against
the lagged values of LVOLSEN and LPRCSEN, and a set of control variables. Next,
we re-estimate our basic regression, with the fitted values from the first step included
as additional control variables. If our results are not driven by the effect of vega on
firm investment policy, the coefficient of vega should remain positive and significant.
Consistent with Coles et al. (2006), we show in Table 5 that a higher vega is
associated with a riskier investment policy, as evident by its positive effect on R&D
intensity and negative effect on firm capital expenditure. More importantly, after
including the fitted values of both R&D and CAPEX in our basic regression, the
coefficient for LVOLSEN remains positive and significant, as reported in columns (3)
to (5) of Table 5. The effect of vega on audit fees remains significant irrespective of
whether we include the fitted measures individually or jointly 6 . Accordingly, we
conclude that our main results are not driven by changes in firm business risk. While
we use delta as a control variable, its effect on audit fees is also of some interest. In
particular, we note that when we include the fitted values of R&D intensity and
capital expenditure in our basic regression, the effect of delta on audit fees becomes
6 As an additional robustness test we repeat our analysis with actual values of CAPEX and R&D included as
control variables. The coefficient for LVOLSEN remains positive and statistically significant.
25
statistically insignificant, thus suggesting that the negative effect of delta on audit
fees as documented in Table 2 is likely due to its effect on firm business risk.
[Insert Table 5 about here]
Endogeneity
Since the relation between vega and audit fees could be driven by endogenous
effects, we also conduct tests for endogeneity. It is possible that both audit fees and
vega are correlated with some time-invariant firm characteristics, resulting in their
apparent relation. We adopt two methods in this section to address this potential
endogeneity problem.
The first method is the changes-in-variables approach (Anderson et al., 2004;
Klock et al., 2005; Jayaraman and Milbourn, 2012). In this approach, we regress the
annual change in LAFEE against the annual change in LVOLSEN, LPRCSEN, and
the control variables. Weber (2006) argues that changes-in-variables analysis is less
affected by endogeneity problems. In addition to providing time-series evidence of
the link between audit fees and vega, firm-specific changes regressions also help
alleviate concerns about correlated omitted variables (Jayaraman and Milbourn,
2012)The results are presented in Table 6. Column (1) presents the results with
changes in CEO compensation portfolio sensitivities only, column (2) presents the
results with changes in auditor characteristics as controls, and column (3) presents
the results with changes in additional firm characteristics as controls. In all three
columns, the change in LVOLSEN is positively and significantly associated with a
change in LAFEE, suggesting that an increase in vega results in an immediate
increase in audit fees. Therefore, the results from the changes-in-variables analysis
suggest that our findings are not driven by endogenous effects.
26
[Insert Table 6 about here]
The second method is the 2SLS approach, a common method in accounting
research in addressing potential endogeneity problem (e.g., Larcker and Rusticus,
2010). In the first stage, we regress LVOLSEN and LPRCSEN against a set of
instrumental variables suggested by prior research (Himmelberg et al., 1999; Knopf
et al., 2002; Coles et al., 2006; Ortiz-Molina, 2006; Brockman et al., 2010), as well as
all the control variables in Eq. (1). The instrumental variables include the cash ratio
(CASH), log CEO tenure (LCEOTNR), log CEO salary and bonus compensation
(LCEOCOMP), sales growth (SGRTH), R&D (RND), and capital expenditure
(CAPEX). Specifically, the cash ratio is the ratio of firm cash holdings to total assets;
log CEO tenure is the natural logarithm of the number of years since the current
CEO became CEO; log CEO salary and bonus compensation is the natural logarithm
of the dollar amount of the CEO’s annual base salary and bonus; sales growth is the
annual growth rate of sales; R&D is the ratio of R&D expenses to sales; and capital
expenditure is the ratio of capital expenses to total assets. In the second stage, we
regress LAFEE against the fitted values of LVOLSEN and LPRCSEN from the first-
stage regressions.
The results for the 2SLS regression are presented in Table 7. Columns (1) and
(2) present the results for the first-stage regression and column (3) presents the
results for the second-stage regression. The table shows that the fitted value of
LVOLSEN is positively and significantly associated with LAFEE, further confirming
that our findings are not driven by endogenous effects.
[Insert Table 7 about here]
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VI. VEGA, AUDIT FEES, AND LITIGATION RISK
In this section we test the second hypothesis by interacting vega with multiple
measures of litigation risk. Following prior research, we consider three measures of
litigation risk. Our first measure of litigation risk is firm size (LBVA). Prior studies
consistently show that auditor litigation risk increases with client size (Stice, 1991;
Carcello and Palmrose, 1994; Lys and Watts, 1994; Heninger, 2001). Our second
measure is the high litigation industry dummy (LITIND), a dummy variable equal to
one if the firm is in the biotechnology, computer, electronics, or retail industries and
zero otherwise. This measure was first suggested by Francis et al. (1994), who show
that firms in these industries are subject to a higher number of litigations compared
to other industries. The industry-based litigation measure is employed by Ajinkya et
al. (2005), Beatty et al. (2008), and Brown and Tucker (2011).
Our third measure is the high litigation risk indicator (LITRISK), which is the
principal component of a set of litigation predictor variables suggested by Shu (2000)
and Kim and Skinner (2012). A higher value of the measure indicates a higher
likelihood of litigation risk. The predictor variables include firm size (LBVA), a high
litigation industry dummy (LITIND), sales growth (SGRTH), stock return, return
volatility, and return skewness. Stock return is the cumulative stock return over the
fiscal year, return volatility is the standard deviation of monthly stock returns over the
fiscal year, and return skewness is the skewness of monthly returns over the fiscal
year. The results reported in column (1) of Table 8 show that the coefficient for the
interaction term between LBVA and LVOLSEN is positive and significant, suggesting
that the effect of vega on audit fees is stronger for larger firms. Column (2) presents
the results for the high litigation industry dummy and our findings show that the effect
28
of vega on audit fees is more pronounced for firms in high litigation risk industries.
Column (3) presents the results for the high litigation risk indicator and our findings
show that the interaction between LITRISK and LVOLSEN is positive and significant.
Since a higher value of LITRISK indicates higher litigation risk, our results suggest a
more significant effect of vega on audit fees for firms subject to higher litigation risk.
These findings are in line with our second hypothesis.
[Insert Table 8 about here]
VII. VEGA, AUDIT FEES, AND SOX
To test our third hypothesis, we interact vega with the SOX dummy (SOXD), a
dummy variable equal to one for the post-SOX era (after year 2002) and zero for the
pre-SOX era (before year 2002). The results presented in column (1) of Table 9
show that the coefficient for the interaction term between SOXD and LVOLSEN is
negative and statistically significant, suggesting that the effect of vega on audit fees
is less pronounced since the implementation of SOX.
To gain further insights into the effect of SOX on the association between vega
and audit fees, we distinguish between the pre- and post-compensation recovery
provision (commonly known as clawbacks) periods. These provisions, first
introduced by the passage of Section 304 of the SOX of 2002 (SOX 304), authorizes
the SEC to enforce the recovery of bonuses paid to corporate executives when a
firm’s financial restatements are due to noncompliance with financial reporting
requirements as a result of misconduct (Babenko et al., 2012; Chan et al., 2012).
Though SOX 304 has been successfully enforced in only a few cases (Salehi and
Marino, 2008; Fried and Shilon, 2011), voluntary adoption of clawback provisions by
companies has become increasingly popular over the last decade (Babenko et al.,
29
2012). Babenko et al. (2012) document that among the S&P 1500 firms, reported
usage of clawback provisions increased from less than 1% in 2000 to over 48% by
2011. The authors also report that by 2011 almost 70% of S&P 500 firms had
adopted a clawback policy. Chan et al. (2012) find that the voluntary adoption of
clawback provisions leads to a reduction in financial misstatements and is perceived
by auditors as associated with lower audit risk, consistent with clawback provisions
reducing managerial incentives to misreport. Since the adoption of clawback
provisions were rare prior to 2005 (Babenko et al., 2012; Chan et al., 2012), we
repeat our analysis on the SOX dummy for the pre-clawback provision sample (i.e.,
2000–2004) to investigate whether the diminishing effect of vega on audit fees in the
post-SOX era is driven by the popularity of clawback provisions.
The results reported in column (2) of Table 9 show that the interaction between
the SOX dummy and vega remains negative and significant, suggesting an
immediate drop in the effect of vega on audit fees since the passage of SOX. We
then investigate whether the adoption of clawback provisions further mitigates the
effect of vega on audit fees. Specifically, we interact vega with the clawback dummy
(CLAWD), a dummy variable equal to one for the years 2003-2005 and zero for the
years after 2005. We perform the test on the post-SOX sample (2003–2010) and the
results presented in column (3) show that the interaction term between CLAWD and
LVOLSEN is negative and significant. Therefore, the effect of vega on audit fees is
further mitigated in the 2005-2010 period. For robustness check purposes, we
conduct all three tests on a sample of firms with observations both before and after
the two events. The purpose of the exercise is to check whether our findings are
driven by differences between the group of firms that exit the sample before the
30
events and the group of firms that enter the sample after the events. Our untabulated
results available upon request are similar to those reported in Table 9.
[Insert Table 9 about here]
VIII. VEGA, AUDIT FEES, AND CEO CHARACTERISTICS
In this section we complement our analysis by examining the effect of CEO
characteristics on the association between vega and audit fees7. More specifically,
we investigate the effect of CEO age, tenure, and power on the relation between
vega and audit fees. Recent research in corporate finance documents that CEO
characteristics impact corporate policies. For example, Malmendier et al. (2011) and
Cronqvist et al. (2012) show that managerial characteristics have significant
explanatory power for corporate financing decisions, while Serfling (2013) suggests
that CEO personal traits may affect risk-taking behavior. Prior theoretical research
suggests that CEO age impacts risk-taking behavior, but the findings are mixed and
inconclusive. For instance, the theoretical models of Scharfstein and Stein (1990),
Hirshleifer and Thakor (1992), Zwiebel (1995), and Holmström (1999) suggest that
career concerns make younger CEOs more risk averse, leading to conservative
investment policies. In contrast, the managerial signaling model of Prendergast and
Stole (1996) suggests that younger CEOs invest aggressively, taking greater risks to
signal their superior ability. Following these studies, we define CEO age (CEOAGE)
7 We also investigate the effect of auditor characteristics on the association between vega and audit fees. For the
sake of brevity, we do not tabulate the results. We consider Big 4, office size, and auditor tenure auditor characteristics. We do not find a significant effect of Big 4 or office size on the relation between vega and audit fees. However, our results show that the relation between vega and audit fee is stronger if the auditor has longer tenure. This finding is consistent with those of Geiger and Raghunanadan (2002), Myers et al. (2003), Ghosh and Moon (2005), and Gul et al. (2007), since they suggest that auditors with longer tenure are able to provide higher-quality auditing services, since auditors need time to develop client-specific knowledge to perform an effective audit. Our intuition is that longer auditor tenure helps auditors understand the compensation policies of the firms they audit.
31
as an ordinal variable equal to one for CEOs with age below 35, two for CEOs with
age between 36-45, three for CEOs with age between 46-55, and four for CEOs with
age above 55. Chen and Zheng (2012) document a positive relation between CEO
tenure and risk taking, suggesting that longer tenure is associated with declining
career concerns. On the other hand, longer tenure is also related to CEO reputation
(Milbourn, 2003). Since misreporting increases firm risk, longer tenure may also
have an adverse effect on CEO incentives to misreport. This discussion suggests
that the effect of CEO age and tenure on the relation between audit fees and vega is
an empirical question, which we address here. We define CEO tenure (LCEOTNR)
as the natural logarithm of the number of years the current CEO became the CEO.
We examine CEO power in terms of unitary versus dual leadership styles.
Following Brickley et al. (1997), we define unitary leadership (CEOUNI) as the case
when the CEO and the chairman of the board titles are vested in one individual and
dual leadership as the case where the two positions are held by different individuals.
Overall, there is a general consensus that unitary leadership enhances CEO power
and leads to negative consequences (e.g., Conyon and Peck, 1998; Goyal and Park,
2002; Adams et al., 2005). Accordingly, we predict that greater CEO power
magnifies the positive relation between audit fees and CEO vega. Table 10 reports
the results for the effect of CEO characteristics (age, tenure, and power) on the
association between vega and audit fees in three columns. Column (1) shows that
the relation between vega and audit fees is stronger if the CEO is older, while in
column (2) we do not find a significant effect for CEO tenure. Our findings in column
(3) show that the relation between vega and audit fees is stronger if the CEO is also
the chairman of the board. Taken together, the findings reported in column (1) are
consistent with the theoretical prediction of the career concerns hypothesis of
32
Scharfstein and Stein (1990), Hirshleifer and Thakor (1992), Zwiebel (1995), and
Holmström (1999) and the results of column (3) are consistent with the notion that
unitary leadership enhances the ability of CEOs to misreport, since CEO power is
greater.
[Insert Table 10 about here]
IX. CONCLUSION
With Release No. 2012-001, the PCAOB proposed a new auditing standard for
related party transactions and amendments to auditing standards regarding
significant unusual transactions. The release stated that auditors must carefully
evaluate and consider the client’s executive compensation practices and specifically
consider executive compensation practices in the context of a company’s financial
relationships and transactions with its executive officers. Although auditors may have
considered these risks prior to the call by the PCAOB, little or no research exists on
the association between executive compensation and auditor compensation. Our
paper is the first attempt to fill the void.
For a large sample of U.S. firms spanning 2000-2010, we show that firms with
high vega, on average, pay higher audit fees. We also find that the association
between vega and audit fees is pronounced for firms that are more susceptible to
litigation risk and the vega-audit fee relation weakens in the post-SOX period. In
addition, we document that CEO age and power and auditor tenure significantly
affect the association between vega and audit fees. Taken together, our results
provide first major evidence that auditors incorporate audit risk associated with risk-
taking incentives induced by executive compensation by charging larger fees from
firms with a high vega.
33
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