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Agency problems and audit fees: further tests of the free cash flow hypothesis
Author(s) -
Griffin Paul A.,
Lont David H.,
Sun Yuan
Publication year - 2010
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2009.00327.x
Subject(s) - free cash flow , business , audit , agency cost , dividend , agency (philosophy) , debt , cash flow , accounting , principal–agent problem , finance , monetary economics , economics , corporate governance , philosophy , epistemology , shareholder
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 US 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.