Article2015

Executive Equity Risk-Taking Incentives and Audit Pricing

Yangyang Chen · Ferdinand A. Gul · Madhu Veeraraghavan · Leon Zolotoy

131 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

ABSTRACT Using a large sample of U.S. firms spanning the period 2000–2010, we document a strong positive association between the sensitivity of CEO compensation portfolio to stock return volatility (vega) and audit fees. We also show that the positive association between vega and audit fees is weaker in the post-Sarbanes-Oxley Act (SOX) period. In supplementary tests, we show that the relation between vega and audit fees is stronger for firms with older CEOs and in firms where the CEO is also chairman of the board. Collectively, our results suggest that audit firms incorporate executive risk-taking incentives in the fees they charge for their services. JEL Classifications: M41; M42; M52.

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References

1995Detecting Earnings Management.2003Corporate Governance and Equity Prices 2012Detecting Earnings Management 1985The Determinants of Firms' Hedging Policies 1999Managerial Incentive Problems: A Dynamic Perspective 2005Managerial incentives and risk-taking☆1980The Pricing of Audit Services: Theory and Evidence 1988Herd Behavior and Investment

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