Managerial Stock Ownership, Analyst Coverage, and Audit Fee

Abstract

The authors study whether managerial ownership and analyst coverage relate to audit fees. To the extent that these corporate governance factors relate to auditor assessment of the firm’s agency costs and hence various risks the auditor must consider in the development of an audit program, they will affect audit effort and hence audit fees. The authors find that managerial equity holdings and analyst coverage are negatively associated with audit fees and that these associations are both statistically and economically significant. On average, a 1% increase in managerial ownership translates into a 0.2% reduction in audit fees. In the low managerial ownership sample (i.e., less than 5% managerial ownership), a 1% increase in the ownership reduces the fees by 1.4%. Similarly, one more analyst following a company reduces audit fees by 9.3%. These results add to the literature on the effects of corporate governance on audit fees.

Analyst Coverage: Does the Listing Location Really Matter?

“…For example, Doukas, McKnigh, and Pantzalis (2005) and Jung, Sun, and Yang (2012) suggest that financial analysts facilitate more effective monitoring of the firms' activities, thereby reducing agency costs and increasing share value. Moreover, Baik, Kang, and Morton (2010) and Gotti, Han, Higgs, and Kang (2012) show that more analysts following increases firm value and reduces audit fees. In addition, Lang, Lins, and Maffett (2012) document higher liquidity and lower transaction costs when the number of analysts following a firm is higher.…”

Analyst Coverage And Audit Efforts: Empirical Approach To Audit Hours

“…Therefore, prior literatures find that there is a negative association between analyst coverage and audit fee in U.S. or China. This argument supports that analyst coverage plays a role of corporate governance to constrain manager's opportunistic earnings management behavior (Gotti et al, 2011;Haw et al, 2012).…”

“…Yu (2008) finds that analysts are capable and resourceful in tracking firms regularly, and they continuously scrutinize management behavior and financial reporting irregularities. Gotti et al (2011) suggest that the existence of a negative relationship between analyst coverage and audit fees using U.S. data from 2000 to 2007. The study supports analysts' monitoring hypothesis that analysts are one of external corporate governance mechanism to monitor managers' earnings management.…”

Effects of regulation on audits: A Canadian example

“…Abernathy, Kang, Krishnan, and Wang () found that the higher the residual audit fees, the lower the analyst forecast accuracy, which means that it is more difficult to forecast earnings for that company, thus indicating poor earnings quality. In spite of the above, Gotti, Han, Higgs, and Kang () found that managerial equity ownership is associated with lower audit fees because management and shareholder interests are aligned. They also stated that the extent of analyst following is associated with lower audit fees (Gotti et al, ).…”

“…In spite of the above, Gotti, Han, Higgs, and Kang () found that managerial equity ownership is associated with lower audit fees because management and shareholder interests are aligned. They also stated that the extent of analyst following is associated with lower audit fees (Gotti et al, ). Deis, Byus, Lelkes, and Reed () analyzed audit fees and audit firm tier for oil and gas companies and found that oil and gas companies have begun to move away from the Big 4 Audit Firms and to the Regional and Local Firms where the audit fees are lower.…”