CEO cultural heritage and the pricing of audit services

This paper examines the impact of firm financial misconduct on its director‐interlocked firms from the perspective of auditors. We argue that when a firm engages in financial misconduct, auditors tend to perceive its director‐interlocked firms as having higher audit risks. This is because accounting policies, procedures and corporate governance can propagate via common directors. Using a sample of listed US firms from 1999 to 2018, we find that auditors charge higher fees for firms whose director‐interlocked firms engage in financial misconduct. Further analyses show that this spillover effect is stronger when focal firms are riskier (when they are financially distressed or have worse earnings quality) or they have weaker alternative monitoring mechanisms (as evidenced by lower institutional shareholding). The effect is also more prominent when the tainted directors hold important positions or the financial misconduct is more severe. We also find that the higher auditor fees arise from not only risk premium but also greater audit effort. Our results are still valid after conducting a series of robustness tests.

Section: Methodsmentioning

confidence: 99%

The spillover effects of financial misconduct on director‐interlocked firms: Evidence from auditor scrutiny

Cai

Wang

2023

“…In addition, the retention of target CEOs—possessing internal management experience (Brockman et al., 2019) and a distinct cultural heritage (Pham, Pham & Truong, 2022)—could potentially enhance value. This suggests the role of the CEO and the information environment is pivotal.…”

Section: Theory and Hypothesis Developmentmentioning

confidence: 99%

“…Moreover, this study extends its analysis to compare the founder results with a counterfactual sample of takeovers where nonfounder CEOs remain. Previous literature has established the importance of the CEO, the information environment or CEO cultural heritage (e.g., Brockman et al., 2019; Pham, Pham & Truong, 2022). Founders, like CEOs, are crucial human capital in a company.…”

Section: Introductionmentioning

confidence: 99%

Founder premiums, venture capital investments and acquirer benefits

Xie

2023

This study investigates whether the retention of founders has a greater impact on deal prices and acquirer benefits compared with the retention of family successors or CEOs when private firms pursue a merger exit strategy. The results demonstrate that higher prices and returns can be achieved when founders remain postmerger. These findings hold up even when considering the acquirer's long‐term operating and market performance, indicating the robustness of the results. Additionally, the study reveals that the effect of founder retention is larger than that of CEO retention, and the effect of founder‐CEO retention is the largest. Furthermore, the study examines multistage investments and exits, revealing that venture capitalists can trade off the benefits of founder maturity and firm growth. This implies that founder premiums vary with the enterprise life cycle. Finally, the study investigates the mechanism behind these results, finding that venture capital backing, high‐tech industry, earnouts and stock‐for‐stock deals as moderators can significantly enhance the founder‐retention effect on acquirer benefits. This study proposes that the specific human capital and entrepreneurial spirit of founders, transcending ownership, emerge as driving forces behind this effect. Founder heterogeneity also suggests that acquirers can benefit more from founder retention when founders are innovative talents or serial entrepreneurs.

“…The specification also includes several controls for management and audit committee characteristics that may affect financial reporting decisions. We include the age of the CEO ( CEO AGE ) and the CEO's gender ( CEO GENDER ) (Krishnan & Parsons, 2008; Lee et al., 2014; Pham et al., 2022). We control for the percentage of financial experts on the audit committee ( AUDIT COM.…”

Section: Model Specifications Data and Samplementioning

confidence: 99%

Audit engagement partner ideology, ideological homophily, and audit quality

Goenner,

Guo,

Notbohm

2023

Previous studies have shown that audit quality is influenced by the audit engagement partner's characteristics. Extending this literature, we examine the association between audit engagement partner ideology (i.e. conservatism) and audit quality. We find that clients whose audit engagement partners are ideologically more conservative receive higher quality audits, as indicated by lower discretionary accruals than clients with less conservative auditors. Additionally, we find evidence that the relation between the auditor's ideology and that of the client's executives influences audit quality, as does the ideological homophily between the auditor and the client's audit committee. Homophilous pairings between the audit engagement partner and the client's executives, where the two parties share a similar ideology, are associated with both higher discretionary accruals and higher probabilities of restatement. Discretionary accruals are also shown to be higher when engagement partners share an ideology with their client's audit committee. We interpret these results as evidence of less effective monitoring by the engagement partner when they share political views with their clients.