Do I Have Your Loyalty?: The Proportion of Named Executive Officers Hired by the CEO, Firm Risk, and Auditors' Fee Premiums

52 Pages Posted: 14 Jan 2022 Last revised: 12 Sep 2023

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Weizhu Hou

Renmin University of China - School of Business

Bo Zhang

School of Business, Renmin University of China

Xindong (Kevin) ZHU

City University of Hong Kong (CityU) - Department of Accountancy

Date Written: September 11, 2023

Abstract

We examine the external implications of a recently documented corporate governance concern – the proportion of a firm’s top management team that is appointed during a CEO’s tenure (i.e., top management team, or TMT, co-option). Specifically, we examine whether an external stakeholder (i.e., auditor) perceives TMT co-option to increase firm risk and if so whether they price that risk. Using a sample of U.S. firms during the 2001-2018 period, we find that TMT co-option is positively associated with audit fees. This result suggests that auditors perceive a firm to be riskier when its CEO appoints a greater proportion of its top management team. Next, we find that a higher degree of TMT co-option appears to increase audit pricing through virtually all risk channels: higher inherent risk, higher control risk, and higher firm litigation risk. In additional analysis, we document that TMT co-option is negatively related to the quality of audited earnings, although auditors appear to increase effort in the face of high inherent, control, and litigation risks accompanied with TMT co-option. We also find that the relation between TMT co-option and audit fees is less pronounced for firms with stronger corporate governance and longer-tenure auditors. Overall, our results support the notion that TMT co-option is a corporate governance concern that increases firm risk, and that at least one external stakeholder (i.e., auditors) detects and prices that risk.

Keywords: Top management team (TMT) co-option; Operating risk; Litigation risk; Audit pricing

JEL Classification: M12; M42

Suggested Citation

Campbell, John L. and Hou, Weizhu and Zhang, Bo and ZHU, Xindong (Kevin), Do I Have Your Loyalty?: The Proportion of Named Executive Officers Hired by the CEO, Firm Risk, and Auditors' Fee Premiums (September 11, 2023). Available at SSRN: https://ssrn.com/abstract=4006842 or http://dx.doi.org/10.2139/ssrn.4006842

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Weizhu Hou

Renmin University of China - School of Business ( email )

Beijing
China

Bo Zhang (Contact Author)

School of Business, Renmin University of China ( email )

59 Zhongguancun Street
Haidian District
Beijing, 100872
China
86-10-62514992 (Phone)

Xindong (Kevin) ZHU

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
227
Abstract Views
917
Rank
249,715
PlumX Metrics