Managerial overconfidence, ability, firm-governance and audit fees

Santanu Mitra (), Bikki Jaggi () and Talal Al-Hayale ()
Additional contact information
Santanu Mitra: Wayne State University
Bikki Jaggi: Rutgers, The State University of New Jersey
Talal Al-Hayale: University of Windsor

Review of Quantitative Finance and Accounting, 2019, vol. 52, issue 3, No 7, 870 pages

Abstract: Abstract Prior studies document that managerial overconfidence potentially increases the risk of financial misstatements, and that overconfident managers purchase lower quality audits and pay lower audit fees. As a part of the research that evaluates the information value of managerial characteristics to auditors, our study examines how the relationship between managerial overconfidence and audit fees is impacted by managerial ability, and board and audit committee effectiveness in the post-Sarbanes–Oxley (post-SOX) environment. In general, we find a significantly positive relationship between managerial overconfidence and audit fees consistent with the supply-side risk based perspective of audit pricing. However, this relationship is significantly attenuated in higher managerial ability firms where overconfident managers are better able to make proper accounting estimates and judgements required for producing reliable financial statements, and synthesize firm-specific information into appropriate forward looking projections. We find that on an average, the overconfident firms with higher managerial ability pay 6.3% lower audit fees than the overconfident firms with lower managerial ability. Our analyses further show that board characteristics positively impact the relationship between managerial overconfidence and audit fees, suggesting that stronger board monitoring increases the demand for higher quality audits to mitigate the reporting risk of the overconfident firms. On an average, the firms with managerial overconfidence pay additional 9.3% higher audit fees when they are subject to stronger and more effective board oversight. However, we find weaker evidence on the effect of audit committee characteristics on audit fees of the overconfident firms. Our primary results hold for a battery of supplemental tests including the tests using propensity-score matched sample. The study contributes to audit fee and corporate governance literature, and has useful implications for regulators, accounting practitioners, and auditors.

Keywords: Audit fees; Audit risk; Board and audit committee characteristics; Managerial ability; Managerial overconfidence (search for similar items in EconPapers)
JEL-codes: M40 M41 M42 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-018-0728-3 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:52:y:2019:i:3:d:10.1007_s11156-018-0728-3

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-018-0728-3

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().