LAUSR.org creates dashboard-style pages of related content for over 1.5 million academic articles. Sign Up to like articles & get recommendations!

How the Design of CEO Equity-Based Compensation can Lead to Lower Audit Fees: Evidence from Australia

Photo by austindistel from unsplash

This paper investigates how the features of CEO equity-based compensation are associated with the agency costs of monitoring (measured by external audit fees) in an Australia setting. We find that… Click to show full abstract

This paper investigates how the features of CEO equity-based compensation are associated with the agency costs of monitoring (measured by external audit fees) in an Australia setting. We find that audit fees significantly increase when firms award large equity grants to CEOs, which is consistent with the notion that auditors perceive higher risk associated with large equity incentives. However, by empirically testing auditors’ responses to the adoption of performance-vesting provisions, we document evidence that it is the use of accounting-based hurdles that potentially encourages unethical reporting issues. We report that audit fees are negatively associated with the use of market-based hurdles, while accounting-based hurdles lead to significantly higher audit fees but combination hurdles lower audit fees. To reduce the possible undesirable properties of accounting-based hurdles, firms adopt longer vesting periods to provide more balanced future-oriented incentives. Practical implications include the remuneration committee being aware of the hidden costs of poorly designed CEO compensation packages and avoiding undesirable ethical implications, particularly, where the CEO has significant power over the corporation.

Keywords: equity based; audit fees; ceo equity; compensation; audit

Journal Title: Journal of Business Ethics
Year Published: 2018

Link to full text (if available)


Share on Social Media:                               Sign Up to like & get
recommendations!

Related content

More Information              News              Social Media              Video              Recommended



                Click one of the above tabs to view related content.