Generalist CEOs and Audit Pricing

Abstract

We analyze the consequences of a firm hiring a generalist CEO in terms of the audit fees paid by the firm. We find that audit fees of clients with generalist CEOs are higher than those of clients with specialist CEOs. This relation is robust to considering managerial ability, other CEO characteristics, various fixed effects, instrumental variables, and change analyses. We further show that fee differences are larger for firms with weaker monitoring and higher corporate litigation risks. Through path analysis, we find that both client business risk and misreporting risk contribute to the fee difference. Finally, we find that auditors are more likely to issue going-concern opinions to clients with generalist CEOs. Our study should be of interest to auditing standard setters who link management operating styles to audit risk. We shed light on how management operating styles associated with the CEOs' general or specialized skills affect audit pricing.

Analysts' knowledge structure and performance

“…Our paper also makes additional contribution to the literature of 'generalist and specialist' in the labour market. There is a widespread phenomenon of 'generalist bias' (Liu et al, 2021;Wang Long & Murnighan, 2013) and most studies in this field employ the range of individual work experiences as a proxy for 'generalist' or 'specialist', while our study measures 'generalist' or 'specialist' based on their knowledge structure from higher education and shows that 'generalists' are not always the right choice (Ma, Lufei, et al 2021;Ma, Wang, et al, 2021;Mishra, 2014). Compared with recent studies on 'generalist' company managers (Chen et al, 2021;He, Wenlei, & Mianzhi, 2019;He, Wenlei, Yichi, et al, 2019;Liu et al, 2021;Xu et al, 2021;Zhao et al, 2018), this article provides additional evidence from the perspective of financial analysts whose performance can be measured more accurately.…”

“…In the labour market, ‘generalist’ tends to be preferred (Liu et al, 2021; Wang Long & Murnighan, 2013) and compensation of ‘generalist’ CEOs is 19% higher than other CEOs (Brockman et al, 2016; Custódio et al, 2013). Nevertheless, Ma, Lufei, et al (2021) show firms operated by generalist CEOs tend to take higher risks and have lower credit ratings, and are charged higher audit fees (Ma, Wang, et al, 2021). That is, firms with generalist CEOs have to undertake extra costs besides their attractiveness.…”

CEO overconfidence and financial reporting complexity: evidence from textual analysis

“…CEOOC serves as the main independent variable, representing CEOOC. When testing the primary model, managerial and corporate governance factors, as well as firm characteristics, are controlled based on previous studies (Chen et al ., 2019; Nadeem, 2021; Ma et al ., 2021; Hesarzadeh and Rajabalizadeh, 2019, 2020; Hesarzadeh et al ., 2020). These factors include CEO tenure ( CEOTen ), CEO financial expertise ( CEOFinExpt ), board independence ( BInd ), board financial expertise ( BFinExpt ), institutional ownership ( InstOwn ), firm size ( Size ), return on assets ( ROA ), total accruals (Accruals), loss (Loss), sales growth ( SalesG ), market-to-book ratio ( MTB ), firm age ( LnAge ) [3], foreign sales ( ForeignS ) and business segments ( Segment ).…”

CEO locality and audit fees

“…where Business risk is proxied by income loss (LOSS_INCOME), earnings volatility (STD_ROA) and stock return volatility (STD_RET) of audit clients (Ma et al, 2021). Specifically, LOSS_INCOME is an indicator variable, which equals 1 for firms reporting negative net income, and 0 otherwise.…”