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Agency Problems and Audit Fees: Further Tests of the Free Cash Flow HypothesisPaul A. GriffinUniversity of California, Davis - Graduate School of Management David H. LontUniversity of Otago - Department of Accountancy and Finance Yuan SunUniversity of California, Berkeley - Haas School of Business Accounting and Finance UC Davis Graduate School of Management Research Paper No. 19-09 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.
Keywords: Audit fees, Free cash flow hypothesis, Agency problems JEL Classification: C30, K22, L80, M40, M41 Accepted Paper SeriesDate posted: September 13, 2009Suggested CitationContact Information
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