CEO Equity Incentives and Audit Fees

50 Pages Posted: 13 Jan 2014 Last revised: 2 Jul 2014

See all articles by Yongtae Kim

Yongtae Kim

Santa Clara University - Leavey School of Business

Haidan Li

Santa Clara University - Leavey School of Business

Siqi Li

Santa Clara University - Leavey School of Business

Date Written: January 13, 2014

Abstract

This study examines whether CEO equity incentives have an impact on audit pricing. Prior studies investigate whether CEO equity incentives motivate executives to manage earnings for personal financial gains. Our focus is on whether auditors perceive CEO equity incentives to be associated with greater earnings manipulation risk and incorporate such risk in their pricing decisions. We find that CEO equity portfolio vega is positively related to audit fees after controlling for other determinants of audit fees, while equity portfolio delta is not significantly related to audit fees. This result holds after we account for potential endogeneity. The evidence suggests that auditors are concerned about CEOs’ incentives to manage earnings because equity holdings tie CEOs’ wealth to risk and cause CEOs to be less risk-averse. The findings in our study improve our understanding of how executive compensation affects auditors’ pricing decisions.

Keywords: Equity Incentives, CEO Compensation, Audit Fees, Earnings Management

JEL Classification: M41, M42, J33

Suggested Citation

Kim, Yongtae and Li, Haidan and Li, Siqi, CEO Equity Incentives and Audit Fees (January 13, 2014). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2378477 or http://dx.doi.org/10.2139/ssrn.2378477

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Haidan Li

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408-554-5181 (Phone)

Siqi Li

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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