How does the executive pay gap influence audit fees? The roles of R&D investment and institutional ownership

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)677-707
Journal / PublicationJournal of Business Finance and Accounting
Volume47
Issue number5-6
Online published13 Dec 2019
Publication statusPublished - Jun 2020

Abstract

Using a sample of US firms from 2003–2014, this study examines how the executive pay gap affects audit fees for firms with different levels of R&D investment and institutional ownership. Consistent with managerial power theory, we find that the executive pay gap is positively associated with audit fees, and that the positive association is attenuated by intense R&D investment and higher institutional ownership. We also find that the executive pay gap more strongly affects audit fees after the passage of the 2010 Dodd–Frank Act and the PCAOB's 2012 call to identify the audit risk related to executive incentive compensation. Additional analyses show that the moderating effects of R&D investment and institutional ownership on the pay gap–audit fees association are not conditional on auditor tenure, but the moderating effect of institutional ownership is stronger for firms hiring specialist auditors. Collectively, our findings suggest that auditors consider the business context, such as innovation initiative and external monitoring, when assessing audit risk related to the executive pay gap.

Research Area(s)

  • audit fees, auditor tenure, executive pay gap, G30, institutional ownership, M12, M42, M52, managerial power, R&D investment, specialist auditor, tournament incentives