Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis
Paul A. Griffin
University of California, Davis - Graduate School of Management
David H. Lont
University of Otago - Department of Accountancy and Finance
University of California, Berkeley - Haas School of Business
June 17, 2009
UC Davis Graduate School of Management Research Paper No. 07-09
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 United States 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.
Number of Pages in PDF File: 37
Keywords: Audit fees, Free cash flow hypothesis, Agency problems
JEL Classification: C30, K22, L80, M40, M41working papers series
Date posted: February 8, 2009 ; Last revised: July 21, 2009
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