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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

Yuan Sun


Boston University - School of Management

June 17, 2009

UC Davis Graduate School of Management Research Paper No. 07-09

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 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, M41

working papers series


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Date posted: February 8, 2009 ; Last revised: July 21, 2009

Suggested Citation

Griffin, Paul A. and Lont, David H. and Sun, Yuan, Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis (June 17, 2009). UC Davis Graduate School of Management Research Paper No. 07-09. Available at SSRN: http://ssrn.com/abstract=1339449 or http://dx.doi.org/10.2139/ssrn.1339449

Contact Information

Paul A. Griffin
University of California, Davis - Graduate School of Management ( email )
3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)
HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

David H. Lont (Contact Author)
University of Otago - Department of Accountancy and Finance ( email )
Box 56
Dunedin, Otago 9054
New Zealand
+64 3 479 8119 (Phone)
+64 3 479 8171 (Fax)
HOME PAGE: http://www.business.otago.ac.nz/acty/
Yuan Sun
Boston University - School of Management ( email )
595 Commonwealth Avenue
Boston, MA MA 02215
United States
1-617-353-2353 (Phone)
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