Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis

37 Pages Posted: 8 Feb 2009 Last revised: 21 Jul 2009

See all articles by Paul A. Griffin

Paul A. Griffin

University of California, Davis - Graduate School of Management

David H. Lont

University of Otago - Department of Accountancy and Finance

Estelle Sun

Boston University - Questrom School of Business

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Date Written: June 17, 2009

Abstract

This study finds that the agency problems of companies with high free cash flow (FCF) and low growth opportunities induce auditors of companies in the United States to raise audit fees to compensate for the additional effort. We also find that high FCF companies with high growth prospects have higher audit fees.

In both cases, higher debt levels moderate the increased fees, consistent with the role of debt as a monitoring mechanism. Other mechanisms to mitigate the agency costs of FCF such as dividend payout and share repurchase (not studied earlier) do not moderate the higher audit fees.

Keywords: Audit fees, Free cash flow hypothesis, Agency problems

JEL Classification: C30, K22, L80, M40, M41

Suggested Citation

Griffin, Paul A. and Lont, David H. and Sun, Estelle Yuan, Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis (June 17, 2009). UC Davis Graduate School of Management Research Paper No. 07-09, Available at SSRN: https://ssrn.com/abstract=1339449 or http://dx.doi.org/10.2139/ssrn.1339449

Paul A. Griffin

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

David H. Lont (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

Box 56
Dunedin, Otago 9054
New Zealand
+64 3 479 8119 (Phone)
+64 3 479 8171 (Fax)

HOME PAGE: http://www.business.otago.ac.nz/acty/

Estelle Yuan Sun

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
1-617-353-2353 (Phone)

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