Does CEO duality constrain board independence? Some evidence from audit pricing

Authors


  • Data Availability: Data are available from the Annual Reports of the sample firms used in this study.

  • The author gratefully acknowledges the helpful comments from Bin Srinidhi, Judy Tsui, John Goodwin, Peter Carey (the discussant), the participants at the 2009 AFAANZ Conference, Gary Monroe (Deputy Editor), and an anonymous reviewer. A special thanks to Ferdinand A. Gul for his helpful comments and direction.

Abstract

This study examines whether CEO duality affects the association between board independence and demand for higher quality audits, proxied by audit fee. The findings show that there is a positive association between board independence and audit fees. This result is consistent with findings of Carcello et al. (2002) that more independent boards demand higher audit quality and effort. However, this positive association is only present in firms without CEO duality, thus suggesting that CEO duality constrains board independence. The results support recommendations against CEO duality by showing that dominant CEOs may compromise the independence of their board of directors. Additionally, evidence is provided that board size (the number of directors on the board) is positively associated with audit fee pricing. This is consistent with prior studies that indicate that larger board sizes are associated with inefficiency and negative firm performance.

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