A Test of the Free Cash Flow and Debt Monitoring Hypotheses: Evidence from Audit Pricing
Posted: 6 May 1998
Date Written: Undated
Abstract
This study examines whether free cash flow (FCF) is associated with higher audit fees and whether levels of debt moderate this relationship. Low growth firms with high FCF are hypothesized to be associated with higher audit fees due to the agency problems associated with high FCF. Also, consistent with Jensen, debt is found to be an effective disciplinary tool to mitigate the agency problems of FCF. Regression results for a sample of low growth Hong Kong firms audited by Big 6 CPA firms provide strong support for Jensen's FCF and debt monitoring hypotheses.
JEL Classification: G32, D12, M40, M49
Suggested Citation: Suggested Citation
Tsui, Judy S.L. and Gul, Ferdinand A., A Test of the Free Cash Flow and Debt Monitoring Hypotheses: Evidence from Audit Pricing (Undated). Available at SSRN: https://ssrn.com/abstract=2696
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