CEO Political Ideology and Audit Pricing
61 Pages Posted: 7 Oct 2018
Date Written: September 9, 2018
We examine the association between CEOs’ political ideologies, proxied by CEOs’ federal-level personal political contributions to the Republican Party relative to the Democratic Party, and audit fees of the firms that the CEOs manage. We hypothesize and find that firms run by CEOs whose political ideologies are aligned with the Republican Party pay lower audit fees than firms run by CEOs whose political ideologies are aligned with the Democratic Party. This finding is robust to various sensitivity checks and to controls for potential endogeneity and self-selection concerns. In addition, we find that CEO political ideology affects audit risk as proxied by financial reporting quality and client business risk, which, in turn, influence audit fees, suggesting that financial reporting quality and client business risk are two channels through which CEO political ideology affects audit fees. Finally, we find that the association between CEO political ideology and audit fees is more pronounced when corporate governance is weaker. Overall, our results suggest that CEO political ideology is a factor that influences audit risk and auditors incorporate such a factor in their audit pricing decisions.
Keywords: Management’s Philosophy and Operating Style, Political Ideology, Audit Fees, Republican Party, Democratic Party
JEL Classification: M42
Suggested Citation: Suggested Citation