Agency problems and audit fees: further tests of the free cash flow hypothesis

Authors: Griffin, Paul A.1; Lont, David H.2; Sun, Yuan3

Source: Accounting and Finance, Volume 50, Number 2, June 2010 , pp. 321-350(30)

Publisher: Wiley-Blackwell

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Abstract:

Abstract

This study finds that the agency problems of companies with high free cash flow (FCF) and low growth opportunities induce auditors of companies in the US to raise audit fees to compensate for the additional effort. We also find that high FCF companies with high growth prospects have higher audit fees. In both cases, higher debt levels moderate the increased fees, consistent with the role of debt as a monitoring mechanism. Other mechanisms to mitigate the agency costs of FCF such as dividend payout and share repurchase (not studied earlier) do not moderate the higher audit fees.

Keywords: Agency problems; Audit fees; Free cash flow hypothesis; G34; G35; M41; M42

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1467-629X.2009.00327.x

Affiliations: 1: Graduate School of Management, University of California, Davis, CA, USA 2: School of Business, University of Otago, Dunedin, New Zealand 3: Haas School of Business, University of California, Berkeley, CA, USA

Publication date: June 1, 2010

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