CEO Behavioral Integrity, Auditor Responses, and Firm Outcomes
50 Pages Posted: 18 Aug 2012 Last revised: 30 Dec 2017
Date Written: December 29, 2017
We examine the auditor response to CEO integrity. We apply behavioral integrity (BI) theory (Simons 2002), which is based upon word-deed congruence, to conceptualize a large-scale measure. Low word-deed congruence should result in more explanations when communicating, and so we use computational linguistics to measure CEO explanations provided in more than 30,000 shareholder letters. Variation in explanations beyond firm fundamentals and CEO-specific characteristics serve as our linguistic-based proxy for CEO BI. We find audit fees increase as BI decreases, but BI is not associated with financial misstatement or litigation. These findings are consistent with auditors undertaking additional work in response to low BI which in turn prevents restatements and lawsuits. The likelihood of option backdating increases as BI decreases, consistent with the contention that auditors had little incentive to prevent backdating. Finally, BI is increasing in future performance, which suggests CEOs partially underpin the returns to high-integrity corporate cultures.
Keywords: CEO behavioral integrity; audit fees; financial misreporting; corporate culture
JEL Classification: J24, L25, M14, M41, M42
Suggested Citation: Suggested Citation