CEO Equity Incentives and Audit Fees

Abstract

This study examines whether CEO equity incentives have an impact on audit pricing. Prior studies investigate whether CEO equity incentives motivate executives to manage earnings for personal financial gains. Our focus is on whether auditors perceive CEO equity incentives to be associated with greater earnings manipulation risk and incorporate such risk in their pricing decisions. We find that CEO equity portfolio vega is positively related to audit fees after controlling for other determinants of audit fees, while equity portfolio delta is not significantly related to audit fees. This result holds after we account for potential endogeneity. The evidence suggests that auditors are concerned about CEOs' incentives to manage earnings because equity holdings tie CEOs' wealth to risk and cause CEOs to be less risk averse. The findings in our study improve our understanding of how executive compensation affects auditors' pricing decisions.