CEO Behavioral Integrity, Auditor Responses, and Firm Outcomes

53 Pages Posted: 18 Aug 2012 Last revised: 3 May 2019

See all articles by Shane S. Dikolli

Shane S. Dikolli

Darden School of Business University of Virginia

Thomas Keusch

INSEAD

William J. Mayew

Duke University - Fuqua School of Business

Thomas D. Steffen

Yale University School of Management

Date Written: April 30, 2019

Abstract

We investigate the audit fee response to CEO behavioral integrity (BI). BI refers to the perceived congruence between an individual’s words and deeds (Simons 2002). Because low word-deed congruence should result in more explanations when communicating, we use variation in explanations beyond firm fundamentals and CEO-specific characteristics in more than 30,000 shareholder letters to serve as a 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 potentially consistent with auditors undertaking additional work in response to low BI, which in turn mitigates the risk of restatements and lawsuits. The likelihood of option backdating increases as BI decreases, consistent with the contention that auditors lacked incentives 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

Dikolli, Shane Sami and Keusch, Thomas and Mayew, William J. and Steffen, Thomas D., CEO Behavioral Integrity, Auditor Responses, and Firm Outcomes (April 30, 2019). Available at SSRN: https://ssrn.com/abstract=2131476 or http://dx.doi.org/10.2139/ssrn.2131476

Shane Sami Dikolli (Contact Author)

Darden School of Business University of Virginia ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

Thomas Keusch

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Thomas D. Steffen

Yale University School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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