The relation between corporate governance mechanisms, executive compensation and audit fees

Abstract

Purpose This paper aims to investigate the effects of some corporate governance mechanisms and executive compensation on audit fees in an emerging market. Design/methodology/approach The study population consists of 540 observations and 90 listed companies on the Tehran Stock Exchange during the years 2009-2014. The statistical model used in this study is a multivariate regression model; besides, the statistical technique used to test the hypotheses proposed in this research is panel data. Findings The changes in the value of a CEO’s own firm stock option portfolio, in thousands of rials (Iran’s currency), for a 0.01 change in stock return volatility and stock price are defined as Vega and Delta, respectively. The results demonstrated that there is a positive association between audit fees and delta, but not Vega; this means that a fee premium is linked to CEO Delta incentives. The findings show that Iranian companies pay more audit fees when they give managers more rewards. In addition, the results show that there is not a significant relationship between fees resulting from audit risk and Delta and Vega incentives of the board. Inconsistent with agency theory, the authors found that the independence of board members did not have any effect on audit fees. As a final point, the outcomes of the paper demonstrate that managers who invest in companies under their own management do not have any impact on the amount of audit fee. To put it another way, there is not any significant connection between the board ownership and audit fees. Practical implications This is one of the most important studies that simultaneously surveys the impacts of corporate governance mechanisms and executive compensation in the Iranian audit market. The results of this study will reveal more than the role of corporate governance mechanisms for society and users of financial statements because as tools on the CEO actions, they always have to pay attention to the implementation of corporate principles in the economic entity’ operation. Originality/value The present study has examined the relationship between two cases of corporate governance mechanisms named the board independence and the board ownership with audit fees in a country where, to the authors’ knowledge as in most other developing markets, such a relationship has not been a subject of empirical research. Moreover, the use of a two-dimensional measure of executive compensation, namely, Delta and Vega incentives, primarily considering research undertaken in an emerging market, as a valuable contribution may be observed.

The impact of the characteristics and behaviors of the board of directors on agency costs in Iran

“…Consequently, our findings of this hypothesis are not robust. It is notable that previous literature also reports an ambiguous relationship, Salehi, Tarighi & Safdari (2018) find no association, and Wyatti (1990), similar to our findings, suggest a negative/positive relationship. Ahmed and Sanda (2008) suggest a positive association.…”

“…The board of directors with independent members and the required legal authority is potentially an effective mechanism to lower agency costs. Salehi, Tarighi, & Safdari (2018) realize that the independence of board members does not affect audit fees in Iran market; they consider audit fees as a measure for audit effort demand. Rosenstein and Wyatti (1990) notice a direct relationship between the increase of unbounded managers in the board and firm value.…”

“…It is considered as an appropriate corporate governance framework to facilitate the objectives of a firm and improve the firm performance through lowering agency costs and improving the firm efficiency (Henry, 2010;Salehi, Tarighi, & Safdari, 2018). Salehi, Tarighi, &Safdari (2018) document a positive association between audit fees and delta, but not Vega; this means that a fee premium is linked to CEO Delta incentives. They proved that Iranian companies pay more audit fees when they give managers more compensation as well.…”

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