Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis
37 Pages Posted: 8 Feb 2009 Last revised: 21 Jul 2009
Date Written: June 17, 2009
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
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