Expression Reflects Mind: Evidence from CEO's Interview Video and Audit Fee

Abstract

Neuropsychological studies have shown that observers unconsciously assess an individual’s credibility based on the observed degree of facial expression fabrication. Building on this theory, we investigate whether auditors incorporate their client CEOs’ dynamic hemifacial asymmetry of expressions (DHFA) into the pricing decision. Consistent with the neuroscience prediction that a high level of DHFA implies a low degree of credibility, we find that auditors charge higher audit fees to firms whose CEOs exhibit greater DHFA in CNBC’s video interviews about corporate earnings. This effect is more pronounced when auditors have a longer relationship with and are geographically closer to their clients, suggesting that additional information from social interactions validates auditors’ preliminary assessments of a CEO’s expression fabrication. We also find that CEOs’ DHFA is positively associated with real earnings management activities, indicating that auditors’ wariness towards CEOs with high DHFA is more likely due to a rational decision than a cognitive bias. Our results are robust to employing the propensity score matching approach, including auditor fixed effects, using an alternative measure of DHFA, and controlling for additional CEO and video characteristics. Collectively, our findings suggest that auditors form rational perceptions on CEOs’ credibility based on their DHFA when making pricing decisions.

Keywords: Dynamic Hemifacial Asymmetry of Expressions, Audit Fees, CEOs’ Video Interviews

JEL Classification: M41, M42