CEO Cultural Heritage and the Pricing of Audit Services

Abstract

We construct preferences towards risk and uncertainty as reflected in the cultural heritage of CEOs managing public firms in the U.S. We demonstrate that auditors take into account cultural traits of CEOs in the pricing of their audit services. We also show CEO cultural heritage is associated with a firm’s misreporting, internal control weakness, and accounting conservatism. The results are robust to controlling for other known attributes of CEOs, firm characteristics, and corporate governance. Our study contributes to research on corporate risk culture, CEO characteristics, and determinants of the pricing of audit services and financial reporting quality.

Keywords: corporate culture, cultural heritage, risk preference, uncertainty avoidance, audit pricing, CEOs, reporting quality

JEL Classification: G32, H25, H26, M40