A Test of the Free Cash Flow and Debt Monitoring Hypotheses: Evidence from Audit Pricing

Posted: 6 May 1998

See all articles by Judy S.L. Tsui

Judy S.L. Tsui

Hong Kong Polytechnic University - School of Accounting and Finance

Ferdinand A. Gul

Monash University Sunway Campus

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

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

Judy S.L. Tsui (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
852 2766 7828 (Phone)
852 2334 7830 (Fax)

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
2,727
PlumX Metrics