CEO Political Ideology and Audit Pricing

61 Pages Posted: 7 Oct 2018

See all articles by Wang Dong

Wang Dong

Zhejiang University - School of Management

Shuo Li

Western Washington University

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Yu (Tony) Zhang

Lawrence Technological University

Date Written: September 9, 2018

Abstract

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

Dong, Wang and Li, Shuo and Xie, Hong and Zhang, Yu (Tony), CEO Political Ideology and Audit Pricing (September 9, 2018). Available at SSRN: https://ssrn.com/abstract=3246551 or http://dx.doi.org/10.2139/ssrn.3246551

Wang Dong

Zhejiang University - School of Management ( email )

Hangzhou, Zhejiang Province 310058
China

Shuo Li

Western Washington University ( email )

United States
3606503202 (Phone)

Hong Xie (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

Yu (Tony) Zhang

Lawrence Technological University ( email )

21000 W 10 Mile Rd
Southfield, MI 48075
United States

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