Agency problems and audit fees: further tests of the free cash flow hypothesis

Authors


  • We thank an anonymous Accounting and Finance reviewer, the discussants at the national meetings of the AAA 2007 (Chicago) (Susan Cammack, Cameron University) and AFAANZ 2007 (Gold Coast) (Michael De Martinis, Monash University) and seminar participants at the University of Otago for their useful comments and suggestions.

Abstract

This study finds that the agency problems of companies with high free cash flow (FCF) and low growth opportunities induce auditors of companies in the US to raise audit fees to compensate for the additional effort. We also find that high FCF companies with high growth prospects have higher audit fees. In both cases, higher debt levels moderate the increased fees, consistent with the role of debt as a monitoring mechanism. Other mechanisms to mitigate the agency costs of FCF such as dividend payout and share repurchase (not studied earlier) do not moderate the higher audit fees.

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