Lead Independent Director Reputation Incentives and Audit Fees

Abstract

Although prior research has recently begun to examine the effects of independent director reputation incentives and the benefits of having a lead independent director, no study has considered the combined impact: the reputation incentives of lead independent directors. This study integrates these emerging streams of research to investigate whether the reputation incentives of lead independent directors affect audit fees. We find that firms with a lead independent director who has relatively low reputation incentives are associated with higher audit fees (compared to firms with a lead independent director who has neutral reputation incentives), consistent with auditors viewing these firms as riskier. Our results suggest that audit fees are 4.72% higher for these firms, which amounts to $134,753 for the average firm-year observation in our sample. We find that our results continue to hold when using an entropy balancing approach and when conducting several other robustness tests.

Keywords: Lead Independent Directors, Audit fees