The Effect of the Audit Fee Type on Investment Cash Flow Sensitivity

Document Type : Research Paper

Authors

1 Associate Prof., Department of Accounting, Faculty of Management and Economics, University of Shahid Bahonar Kerman, Kerman, Iran

2 Ph.D. Candidate, Department of Accounting, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran.

Abstract

Objective: The phenomenon of investment cash-flow sensitivity is strongly affected by information asymmetry and agency conflict. The use of auditors to reduce such problems is therefore necessary because auditors make greater efforts to reduce the audit risks associated with the investment cash-flow sensitivity, which improves the audit quality, facilitates external financing, and reduces the investment cash-flow sensitivity.
Methods: To achieve the study objectives, a total of 112 firms listed in the Tehran Stock Exchange for the period of 2009-2016 were selected, and the study hypotheses were assessed using multivariate regression analysis with fixed effects.
Results: The results confirmed that the firms listed in the Tehran Stock Exchange are sensitive to investment cash-flow, and ordinarynormal audit fees have a reducing effect on the level of investment cash-flow sensitivity, while higherabnormal audit fees increase the severity of investment cash-flow sensitivity.
Conclusion: It is expected that auditors reduce the audit risk associated with investment cash-flow sensitivity by making extra efforts, and demand higher fees for their efforts. Therefore, by increasing the credibility of financial statements, the problem of information asymmetry and agency conflict will be reduced, and firms can easily use external financing. It is also possible that because of their financial dependence on the client, auditors will be reluctant to make the extra efforts to reduce the audit risk associated with investment cash-flow sensitivity. This intensifies information asymmetry and the agency conflict, and because of the poor audit quality, external financing will be costlier than internal financing, and investment cash-flow sensitivity will increase.

Keywords

References

References
Arabsalehi, M., & Kazemi Noori. S. (2014). Impact of Agency Costs on Investment-cash Flow Sensitivity. Journal of Accounting Knowledge, 5(17), 97-118. (in Persian)
Baker, M., Stein, J. C., & Wurgler, J. (2003). When does the market matter? Stock prices and the investment of equity-dependent firms, Quarterly Journal of Economics, 118 (3), 969-1005.
Becker, B., & Sivadasan, J. (2006). The Effect of Financial Development on the Investment-Cash Flow Relationship: Cross-Country Evidence from Europe. ECB Working Paper 689.
Ben Mohamed, E., Fairchild, R. & Bouri, A. (2014). Investment cash flow sensitivity under managerial optimism: New evidence from NYSE panel data firms. Journal of Economic Finance and Administrative Science, 19 (36), 11-18.
Campello, M., Graham, J.R, & Harvey, C.R.) 2010(. The real effects of financial constraints: evidence from a financial crisis. Journal of Finance Economic, 97(3), 470–487.
Carson, E. & Fargher, N. (2007). Note on audit fee premiums to client size and industry specialization. Accounting & Finance, 47(3), 423–446.
Cho, J. H., Kim, J.B. & Zang, Y. (2006). The association between Audit Quality and Abnormal Audit Fees. Available at SSRN: https://ssrn.com/abstract=848067.
Choi, J.H., Kim, J. B. & Zang, Y. (2010). Do Abnormally High Audit Fees Impair Audit Quality? Auditing: A Journal of Practice & Theory, 29 (2), 115-140.
Chowdhury, J., Kumar, R. & Shome, D. (2016). Investment–cash flow sensitivity under changing information asymmetry. Journal of Banking & Finance, 62, 28-40.
Datar, S. M., Feltham, G. A. & Hughes, J. S.) 1991). The role of audits and audit quality in valuing new issues. Journal of Accounting and Economics, 14(1), 3–49.
DeAngelo, L. (1981). Auditor independence, Low Balling, and disclosure regulation. Journal of Accounting and Economics, 3(2), 113-127.
Degryse, H., & DeJong, A. (2006). Investment and internal finance: Asymmetric information or managerial discretion? International Journal of Industrial Organization, 24, 125–147.
Derouich, I., Hassan, M., Amdouni, S. (2017). Ownership structure and investment-cash flow sensitivity. Journal of Management & Governance, 22 (1), 31–54.
Eshleman, J. D., & Peng, G. (2014). Abnormal Audit Fees and Audit Quality: The Importance of Considering Managerial Incentives in Tests of Earnings Management. Auditing: A Journal of Practice & Theory, 33 (1), 117-138.
Fang, C. L., Lin, Y.C, & Chen, C.S. (2014). Accrual Quality and Audit Fees: The Role of Abnormal Audit Fees. Auditing: A Journal of Practice & Theory, 33 (1), 117-138.
Fazzari, S., Hubbard, G., & Petersen, B. (1988). Finance constraints and corporate investment. Brookings Papers on Economic Activity, 1, 141–195.
Feltham, G. A., Hughes, J. S. & Simunic, D. A. (1991). Empirical assessment of the impact of auditor quality on the valuation of new issues. Journal of Accounting & Economics, 14, 375-399.
Francis, B., Hasan, I., Song, L. & Waisman, M. (2013). Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets. Emerging Markets Review, 15, 57–71
Griffin, P., Lont, D. & Sun, Y. (2009). Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis. Accounting and Finance, 50 (2), 321-350.
Gupta PP, Krishnan GV, Yu W. (2009). You get what you pay for: An examination of audit quality when audit fee is low. Working Paper.
Haghighat, H., & Zargar Fioji, Y. (2013). The Impact of Corporate Cash Holdings and Financial Constraints on Investment-Cash Flow Sensitivity. Applied Research in Financial Reporting, 2(2), 149-174. (in Persian)
Hashemi, S, & Afuoni, A. (2017). The effect of the level of cash holdings on the Investment-cash Flow than operating cash flow fluctuations in financial constraints companies. Accounting and Auditing Studies, 6(21), 4-17. (in Persian)
Higgs, J. L. & Skantz, T. R. (2006). Audit and non audit fees and the market’s reaction to earnings announcements. Auditing: A Journal of Practice & Theory, 25 (1), 1-26.
Hovakimian, G. (2009). Determinants of Investment Cash Flow Sensitivity. Financial Management, 38. (1), 161 - 183.
Jahanshad, A., & Shabani, D. (2015). The impact of financial constraints on the relationship between institutional investors and Investment cash flow sensitivity. The Financial Accounting and Auditing Researches, 7(27), 39-56. (in Persian)
Jamali, A., & Karami, M. (2016). Investigating the Effect of Agency Costs on Auditing in Companies Acquired in Tehran Stock Exchange. Audit Science, 16(64), 81-98.
(in Persian)
Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323–329.
Johnson, W.A., Agyapomaa, G.K. & Joshua, Y.A. (2018). Debt Holdings and Investment Cash Flow Sensitivity of Listed Firms. International Journal of Emerging Markets, 4, 1-17.
Kaplan, S. & Zingales, L. (1997). Do investment–cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics, 112, 169–215.
Khodadadi, V. & Haji Zadeh, S. (2012). Agency Theory and Audit Fees; Test of Free Cash Flow Hypothesis. Empirical Research of Financial Accounting, 1(2), 76-92. (in Persian)
Kim, Y., Li, H. & Li, S. (2014). CEO Equity Incentives and Audit Fees. Contemporary Accounting Research, 32 (2), 608–638.
Kim. T. N.  (2014). The impact of cash holdings and external financing on investment cash flow sensitivity. Review of Accounting and Finance, 13 (3), 251-273.
Kimberly, G., Kimberly, C., Adam, J.A. & Yezen, H.K. (2015). Auditor Pricing of Excess Cash Holdings. Journal of Accounting, Auditing & Finance, 32(3), 423-443.
Kinney, W. R, & Libby. R. (2002). Discussion of the relation between auditors fees for nonaudit services and earnings management. Accounting Review, 77, 107-114.
Lamont, O., Polk, C. & Saa-ReQuejo, J. (2001). Financial constraints and stock returns. Review of Financial Studies, 14 (1/2), 529-554.
Lyandres, E. (2007). Costly external financing, investment timing, and investment–cash. Journal of Corporate Finance, 13 (5), 959-980.
Mansouri Sernjianeh, M. & Tanani, M. (2014). Stock Market Reaction to Abnormal Audit Fees. Financial Accounting Researches, 5(4), 105- 120. (in Persian)
Modigliani, F, & Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48, 261–297.
Mousavi, S., Daroghe Hazrat, F. (2011). Investigating the relationship between free cash flow and audit fees in listed companies of Tehran Stock Exchange. Quarterly Financial Accounting, 3(10), 141-173. (in Persian)
 Myers, S., Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 187–221.
Nooteboom, B. (1993). Firm size effect on transaction costs. Small Business Economics, 5 (4), 283–295.
Pawlina, G. & Renneboog, L. (2005). Is Investment Cash Flow Sensitivity Caused by Agency Costs or Asymmetric Information? European Financial Management, 11, 483-513.
Peruzzi, V. (2017). Does family ownership structure affect investment-cash flow sensitivity? Evidence from Italian SMEs. Applied Economics, 49 (43), 4378-4393.
Pindado, J., Requejo, I., & Dela Torre, C. (2011). Family control and investment–cash flow sensitivity: Empirical evidence from the Euro zone. Journal of Corporate Finance, 17, 1389–1409.
Rajan, R.G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. Journal of Finance, 50 (5), 1421–1460.
Riaz, Y., Shahab, Y., Bibi, R. & Zeb, S. (2017). Investment-cash flow sensitivity and financial constraints: evidence from Pakistan. South Asian Journal of Global Business Research, 5(3), 403-423.
Sadidi, M. & Mohammadi Saniyany, A. (2013). Investigate the relationship between Investment cash flow sensitivity and the level of investment expenditures. Empirical Studies in Financial Accounting, 41,105-130. (in Persian)
Salehi, A., Mosavei, R. & Moradi, M. (2017). An investigate the effect managerial optimism on investment sensitivity to cash flow. Financial Knowledge of Securities Analysis, 10(33), 65-76. (in Persian)
Simunic, D. A. (1980). The pricing of audit services: theory and evidence. Journal of Accounting Research, 18(1), 161-190.
Thoa, T.T.K., & Uyen, N.T.U. (2017). Banking System Reform and Investment - Cash flow Relation: Case of a Small Transition Economy. Research in International Business and Finance, 41, 500-515.
Vaez, S. A. & Taimoury, M. (2014). The Relationship between Abnormal Audit Fees and Accruals Estimation Error in Companies Listed on the Stock Exchange. Accounting Review, 1(3), 95-111. (in Persian)
Wang, F. (2005). Corporate Liqudity and Equity Retunes.  Available in: https://www. investopedia.com/articles/basics/07/liquidity.asp.
Whisenant, S., Sankaraguruswamy, S. & Raghunandan, K. (2003). Evidence on the joint determination of audit and non-audit fees. Journal of Accounting Research, 41 (4), 721-744.
 
Accounting and Auditing Review
Volume 26, Issue 1
2019
Pages 65-86

Files

Share

How to cite

Statistics