CEO inside debt and industry specialist auditor

Hyeesoo (Sally) Chung, Jong-Yu Paula Hao and Jinyoung Wynn

Managerial Auditing Journal, 2024, vol. 39, issue 6, 603-623

Abstract: Purpose - This paper aims to examine the effect of executive compensation incentives, specifically CEO inside debt holdings, on the choice of industry specialist auditor. Design/methodology/approach - High inside debt holdings are expected to constrain excessive managerial risk-taking and align the interests of managers and outside debtholders. The authors hypothesize that reduced debtholders’ expropriation concerns will decrease the demand for high audit quality, measured by industry specialization. The authors investigate a sample of US firms from 2006 to 2018 using OLS regression and use CEO relative leverage to proxy for CEO inside debt holdings. The authors conduct an additional two-stage least squares regression analysis to address potential endogeneity issues. Findings - The paper finds that firms with higher levels of CEO inside debt tend not to appoint an auditor with industry specialization. This result is consistent with the notion that inside debt mitigates agency conflicts between managers and debtholders, reducing the demand for high-quality audits as a monitoring mechanism. The paper also finds that among firms which are excessively leveraged, those with higher levels of CEO inside debt tend to appoint an industry specialist auditor. Originality/value - The findings contribute to the literature on agency cost and auditor choice by demonstrating that CEO inside debt has both substitutive and complementary effects on demand for industry specialist auditors.

Keywords: Agency cost; CEO inside debt; Audit quality; Industry specialization; Corporate governance (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
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:eme:majpps:maj-08-2023-4017

DOI: 10.1108/MAJ-08-2023-4017

Access Statistics for this article

Managerial Auditing Journal is currently edited by Professor Jie Zhou

More articles in Managerial Auditing Journal from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().