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Effect of Management Ability and Corporate Governance Mechanisms on the Relationship between Managerial Overconfidence and Audit Fees

,

Document Type : Research Paper

Abstract

Purpose: Financial statements approved by the auditor are the most important source of information for investors. Therefore, determining the audit fee with the company management decision is very important. Management also has characteristics that are considered in negotiation for audit fees. The purpose of this study is to investigate the effect of managers’ ability and corporate governance mechanisms on the relationship between managerial overconfidence and audit fees.
Methods: The research hypotheses were tested by collecting data from 124 companies listed in Tehran Stock Exchange and Farabours during the period 2014-2019. Management ability was measured using Demirjian et al.’s (2012) Data Envelopment Analysis (DEA) model and managerial overconfidence was also measured through the index of excess investment in the assets of Ahmed and Duelman’s (2013) model and corporate governance was also measured by the model introduced by Cassell et al. (2012) for the board of directors and audit committee  
Results: According to research findings, management ability has a negative and significant effect on the relationship between managerial overconfidence and audit fees. But the effect of the board of directors and audit committee on the relationship between managerial overconfidence and audit fees were not significant.
Conclusion: This study revealed that managers with higher ability are more likely to reduce the risk of auditing , even in firms with managerial confidence .
Contribution: Since management overconfidence increases the risk of optimal decisions in the company, therefore by examining the significant impact of management ability and corporate governance mechanisms on audit fees in companies with overconfident managers, this study adds a new perspective to the literature of management characteristics and management relationships with auditor through audit fees.

Keywords

References
AbbasZadeh, M.R., Fakour, H, Ghannad, M, (2017). The Relationship between the audit committee features and Audit services Fees. The Journal of Financial Accounting Knowledge, 4 (3): 47-64 (In Persian).
2. Abbott LJ, Parker S, Peters GF, Raghunandan K (2003) The association between audit committee characteristics and audit fees. Audit J Pract Theory 22(2):17–32.
3. Ahmed AS, Duellman S (2013) Managerial overconfidence and accounting conservatism. J Acc Res 51(1):1–30.
4. Andreou, p., D. Ehrlich, and C. louca. (2013).Managerial ability and Firmperformance: Evidence from theglobal financial crisis. Working paper.Available at. http://www.mfsociety.org
5. Badavar Nahandi, Y, Heshmat, N, (2018). The Impact of Corporate Governance’s Mechanisms on the Relationship of Managerial Ability and Created Shareholders Value. Management Accounting, 11 (38): 93-108 (In Persian).
6. Bamber L, Jiang J, Wang I (2010) What’s my style? The influence of top managers on voluntary corporate financial disclosure. Acc Rev 85(4):1131–1162.
7. Beck MJ, Mauldin EG (2014) Who’s really in charge? Audit committee versus CFO power and audit fees. Acc Rev 89 (6):2057–2085.
8. Beshkooh, M, Keshavarz, F, (2018). The Relationship between the Managerial Overconfidence and Stock Price Crash Risk in Firms Listed in Tehran Stock Exchange. Journal of Financial Management Strategy, 6 (2): 192-217 (In Persian).
9. Carcello JV, Hermanson DR, Neal TL, Riley RA (2002) Board characteristics and audit fees. Contemp Acc Res 19(3):365–384.
10. Cassell CA, Giroux GA, Myers LA, Omer TC (2012) The effect of corporate governance on auditor-client realignments. Audit J Pract Theory 31(2):167–188.
11. Chen, C.X., Gores, T., Nasev, J. (2013). Managerial overconfidence and cost stickiness. Working Paper, Available at SSRN: http://ssrn.com/abstract=2208622
12. De Franco. G., Kothari, S.P., Verdi, R.S. (2011). The benefits of financial statement comparability. Journal of Accounting Research, 49, 895-931.
13. Demerjian P, Lev B, McVay S (2012) Quantifying managerial ability: a new measure and validity tests. Manage Sci 58(7):1229–1248.
14. Demerjian PR, Lev B, Lewis MF, McVay SE (2013) Managerial ability and earnings quality. Acc Rev 88(2):463–498.
15. Duellman S, Hurwitz H, Sun Y (2015) Managerial overconfidence and audit fees. J Contemp Acc Econ 11(2):148–165.
16. Dyreng, S., Hanlon, M., Maydew, E. (2010). The effects of executives on corporate tax avoidance. The Accounting Review, 85(4), 1163–1189.
17. Ge W, Matsumoto D, Zhang J (2011) Do CFOs have styles of their own? An empirical investigation of the effect of individual CFOs on accounting practices. Contemp Acc Res 28(4):1141–1179.
18. Hasas Yeganeh, Y, Hasani Alghar, M, Marfou, M, (2015). Managerial overconfidence and audit fees. Accounting and Auditing Review, 22 (3): 363-384. (In Persian).
19. Hribar P, Yang H (2016) CEO overconfidence and management forecasting. Contemp Acc Res 33(1):204–227.
20. Hribar, P., Kim, J., Wilson, R., & Yang, H. (2012). Counterparty responses to managerial overconfidence. Working Paper. University of Iowa and University of Pennsylvania.
21. Huang HW, Parker RJ, Yan YCA, Lin YH (2014) CEO turnover and audit pricing. Acc Horiz 28(2):297–312.
22. Huang X, Sun L (2017) Managerial ability and real earnings management. Adv Account 39:91–104.
23. Imani, M, Abdi, M, Kazemi Olum, M, (2017). Investigating the Impact of Gender Diversity in the Audit Committee on the Audit Fees of Companies Listed in Tehran Stock Exchange. Accounting and Auditing Review, 24 (3): 303-322. (In Persian)
24. Ji, G., & Lee, J.E. (2015). Managerial overconfidence and going-concern modified audit opinion decisions. The Journal of Applied Business Research, 31(6), 2123-2138.
25. Jiraporn, P., Leelalai, V., & Tong, S. (2015). The effect of managerial ability on dividend policy : How do talented managers view dividend payouts? Applied Economics Letters, 4851(November). http://doi.org/10.1080/13504851.2015. 1114572.
26. Johnson EN, Kuhn JR, Apostolou BA, Hassell JM (2013) Auditor perceptions of client narcissism as a fraud attitude risk factor. Audit J Pract Theory 32(1):203–219.
27. Kashanipour, M, Ghanbari, A.M., Bayazidi, A, (2019). The Investigating the Economic Consequences of Managers’ Overconfidence in Exchange Companies. Journal of Accounting Advances, 11 (1): 253-284 (In Persian).
28. Khazaei, M, Zalaghi, H, Aflatooni, A, (2019). Impacts of Management Ability on of Financial Statement Comparability. Journal of Accounting knowledge, 10 (2): 21-42 (In Persian).
29. Kiziria TG, Mayhew BW, Sneathen LD (2005) The impact of management integrity on audit planning and evidence. Audit J Pract Theory 24(2):49–67.
30. Krishnan GV, Wang C (2015) The relations between managerial ability audit fees and going concern opinions. Audit J Pract Theory 34(3):139–160.
31. Krishnan J, Krishnan J, Song H (2011) The effect of auditing standard no. 5 on audit fees. Audit J Pract Theory 30(4):1–27.
32. Malekian, E, Ahmadpour, A, Talebtabar Ahangar, M, (2012).The Relationship between Some Corporate Governance, Audit Fees and Meter Ownership of Companies Listed in Tehran Stock Exchange. Financial Accounting Researches, 4 (4): 37-50. (In Persian).
33. Malmendier U, Tate G (2005) CEO overconfidence and corporate investment. J Financ 60:2661–2700.
34. Malmendier U, Tate G (2008) Who makes acquisition? CEO overconfidence and the market’s reaction. J Finance Econ 89:20–43.
35. Malmendier U, Tate G, Yan J (2011) Overconfidence and early life experiences: the effect of managerial traits on corporate financial policies. J Finance 66:1687–1733.
36. Mitra, S., Jaggi, B., & Al-Hayale, T. (2019) Managerial overconfidence, ability, firm-governance and audit fees. Review of Quantitative Finance and Accounting, 52 (3), 841-870.
37. Namazi, M, Ghaffari, M.J., (2015).The Importance and Role of Managerial Ability Information and Financial Ratios as a Criterion for the Optimal Stock Portfolio Selection in Tehran Stock Exchange (Via Data Envelope Analysis). Quarterly financial accounting journal, 7 (26): 1-30(In Persian).
38. NasiriPour Dori, S, Banimahd, B, Ahmadzadeh, H, (2016). Managerial Overconfidence and Earnings Overstatement. Management Accounting, 9 (30): 55-65 (In Persian).
39. Nasirzadeh, F., Abbaszadeh M, R, zolfagharArani, M, H. (2017). Examining the impact of overconfidence of managers and the resulting information asymmetry on risk of falling of stock prices. quarterly financial accounting journal. 9(34): 35-70
40. Oradi, J, Nasirzadeh, F, Hesarzadeh, R, (2019). The Effects of Competition in Audit Market on Audit fee: The Role of Audit Market Size. Journal of Accounting Advances, 10 (2): 1-29. (In Persian).
41. Ramezani, A, Banimahd, B, Royaee, R, (2016). Audit market share and auditor's opinion: evidence from Iranian audit private sector. Accounting knowledge and management auditing, 13 (4): 77-86 (In Persian).
42. Sajadi, S.H., Bonabi Ghadim, R, (2016). Investigating the Impact of Intellectual Value Added on Financial Misery of Companies Listed in Tehran Stock Exchange. Audit Science, 15 (61): 5-25 (In Persian).
43. Sankaraguruswamy, S. & Whisenant, S. (2004). Pricing Initial Audit Engagements: Empirical Evidence Following Public Disclosure of Audit Fees. Working paper, University of Houston.
44. Schrand CM, Zechman SLC (2012) Executive overconfidence and the slippery slope to financial misreporting. J Acc Econ 53:311–329.
45. Schrand, C. M. & Zechman, S. L. (2011). Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53 (1-2), 311-29.
46. Sepasi, S, Anvari Rostami, A.A., Sayadi Soumar, A, (2016). Investigating the effect of managerial ability on financial restatements: with emphasis on Opportunistic Incentives. The Journal of Financial Accounting Knowledge, 2 (4): 89-110 (In Persian).
47. Simunic D (1980) The pricing of audit services: theory and evidence. J Acc Res 18(1):161–190.
48. Wang C, Raghunandan K, McEwen RA (2013) Non-timely 10-K filings and audit fees. Acc Horiz 27(4):737–755.
AbbasZadeh, M.R., Fakour, H, Ghannad, M, (2017). The Relationship between the audit committee features and Audit services Fees. The Journal of Financial Accounting Knowledge, 4 (3): 47-64 (In Persian).
2. Abbott LJ, Parker S, Peters GF, Raghunandan K (2003) The association between audit committee characteristics and audit fees. Audit J Pract Theory 22(2):17–32.
3. Ahmed AS, Duellman S (2013) Managerial overconfidence and accounting conservatism. J Acc Res 51(1):1–30.
4. Andreou, p., D. Ehrlich, and C. louca. (2013).Managerial ability and Firmperformance: Evidence from theglobal financial crisis. Working paper.Available at. http://www.mfsociety.org
5. Badavar Nahandi, Y, Heshmat, N, (2018). The Impact of Corporate Governance’s Mechanisms on the Relationship of Managerial Ability and Created Shareholders Value. Management Accounting, 11 (38): 93-108 (In Persian).
6. Bamber L, Jiang J, Wang I (2010) What’s my style? The influence of top managers on voluntary corporate financial disclosure. Acc Rev 85(4):1131–1162.
7. Beck MJ, Mauldin EG (2014) Who’s really in charge? Audit committee versus CFO power and audit fees. Acc Rev 89 (6):2057–2085.
8. Beshkooh, M, Keshavarz, F, (2018). The Relationship between the Managerial Overconfidence and Stock Price Crash Risk in Firms Listed in Tehran Stock Exchange. Journal of Financial Management Strategy, 6 (2): 192-217 (In Persian).
9. Carcello JV, Hermanson DR, Neal TL, Riley RA (2002) Board characteristics and audit fees. Contemp Acc Res 19(3):365–384.
10. Cassell CA, Giroux GA, Myers LA, Omer TC (2012) The effect of corporate governance on auditor-client realignments. Audit J Pract Theory 31(2):167–188.
11. Chen, C.X., Gores, T., Nasev, J. (2013). Managerial overconfidence and cost stickiness. Working Paper, Available at SSRN: http://ssrn.com/abstract=2208622
12. De Franco. G., Kothari, S.P., Verdi, R.S. (2011). The benefits of financial statement comparability. Journal of Accounting Research, 49, 895-931.
13. Demerjian P, Lev B, McVay S (2012) Quantifying managerial ability: a new measure and validity tests. Manage Sci 58(7):1229–1248.
14. Demerjian PR, Lev B, Lewis MF, McVay SE (2013) Managerial ability and earnings quality. Acc Rev 88(2):463–498.
15. Duellman S, Hurwitz H, Sun Y (2015) Managerial overconfidence and audit fees. J Contemp Acc Econ 11(2):148–165.
16. Dyreng, S., Hanlon, M., Maydew, E. (2010). The effects of executives on corporate tax avoidance. The Accounting Review, 85(4), 1163–1189.
17. Ge W, Matsumoto D, Zhang J (2011) Do CFOs have styles of their own? An empirical investigation of the effect of individual CFOs on accounting practices. Contemp Acc Res 28(4):1141–1179.
18. Hasas Yeganeh, Y, Hasani Alghar, M, Marfou, M, (2015). Managerial overconfidence and audit fees. Accounting and Auditing Review, 22 (3): 363-384. (In Persian).
19. Hribar P, Yang H (2016) CEO overconfidence and management forecasting. Contemp Acc Res 33(1):204–227.
20. Hribar, P., Kim, J., Wilson, R., & Yang, H. (2012). Counterparty responses to managerial overconfidence. Working Paper. University of Iowa and University of Pennsylvania.
21. Huang HW, Parker RJ, Yan YCA, Lin YH (2014) CEO turnover and audit pricing. Acc Horiz 28(2):297–312.
22. Huang X, Sun L (2017) Managerial ability and real earnings management. Adv Account 39:91–104.
23. Imani, M, Abdi, M, Kazemi Olum, M, (2017). Investigating the Impact of Gender Diversity in the Audit Committee on the Audit Fees of Companies Listed in Tehran Stock Exchange. Accounting and Auditing Review, 24 (3): 303-322. (In Persian)
24. Ji, G., & Lee, J.E. (2015). Managerial overconfidence and going-concern modified audit opinion decisions. The Journal of Applied Business Research, 31(6), 2123-2138.
25. Jiraporn, P., Leelalai, V., & Tong, S. (2015). The effect of managerial ability on dividend policy : How do talented managers view dividend payouts? Applied Economics Letters, 4851(November). http://doi.org/10.1080/13504851.2015. 1114572.
26. Johnson EN, Kuhn JR, Apostolou BA, Hassell JM (2013) Auditor perceptions of client narcissism as a fraud attitude risk factor. Audit J Pract Theory 32(1):203–219.
27. Kashanipour, M, Ghanbari, A.M., Bayazidi, A, (2019). The Investigating the Economic Consequences of Managers’ Overconfidence in Exchange Companies. Journal of Accounting Advances, 11 (1): 253-284 (In Persian).
28. Khazaei, M, Zalaghi, H, Aflatooni, A, (2019). Impacts of Management Ability on of Financial Statement Comparability. Journal of Accounting knowledge, 10 (2): 21-42 (In Persian).
29. Kiziria TG, Mayhew BW, Sneathen LD (2005) The impact of management integrity on audit planning and evidence. Audit J Pract Theory 24(2):49–67.
30. Krishnan GV, Wang C (2015) The relations between managerial ability audit fees and going concern opinions. Audit J Pract Theory 34(3):139–160.
31. Krishnan J, Krishnan J, Song H (2011) The effect of auditing standard no. 5 on audit fees. Audit J Pract Theory 30(4):1–27.
32. Malekian, E, Ahmadpour, A, Talebtabar Ahangar, M, (2012).The Relationship between Some Corporate Governance, Audit Fees and Meter Ownership of Companies Listed in Tehran Stock Exchange. Financial Accounting Researches, 4 (4): 37-50. (In Persian).
33. Malmendier U, Tate G (2005) CEO overconfidence and corporate investment. J Financ 60:2661–2700.
34. Malmendier U, Tate G (2008) Who makes acquisition? CEO overconfidence and the market’s reaction. J Finance Econ 89:20–43.
35. Malmendier U, Tate G, Yan J (2011) Overconfidence and early life experiences: the effect of managerial traits on corporate financial policies. J Finance 66:1687–1733.
36. Mitra, S., Jaggi, B., & Al-Hayale, T. (2019) Managerial overconfidence, ability, firm-governance and audit fees. Review of Quantitative Finance and Accounting, 52 (3), 841-870.
37. Namazi, M, Ghaffari, M.J., (2015).The Importance and Role of Managerial Ability Information and Financial Ratios as a Criterion for the Optimal Stock Portfolio Selection in Tehran Stock Exchange (Via Data Envelope Analysis). Quarterly financial accounting journal, 7 (26): 1-30(In Persian).
38. NasiriPour Dori, S, Banimahd, B, Ahmadzadeh, H, (2016). Managerial Overconfidence and Earnings Overstatement. Management Accounting, 9 (30): 55-65 (In Persian).
39. Nasirzadeh, F., Abbaszadeh M, R, zolfagharArani, M, H. (2017). Examining the impact of overconfidence of managers and the resulting information asymmetry on risk of falling of stock prices. quarterly financial accounting journal. 9(34): 35-70
40. Oradi, J, Nasirzadeh, F, Hesarzadeh, R, (2019). The Effects of Competition in Audit Market on Audit fee: The Role of Audit Market Size. Journal of Accounting Advances, 10 (2): 1-29. (In Persian).
41. Ramezani, A, Banimahd, B, Royaee, R, (2016). Audit market share and auditor's opinion: evidence from Iranian audit private sector. Accounting knowledge and management auditing, 13 (4): 77-86 (In Persian).
42. Sajadi, S.H., Bonabi Ghadim, R, (2016). Investigating the Impact of Intellectual Value Added on Financial Misery of Companies Listed in Tehran Stock Exchange. Audit Science, 15 (61): 5-25 (In Persian).
43. Sankaraguruswamy, S. & Whisenant, S. (2004). Pricing Initial Audit Engagements: Empirical Evidence Following Public Disclosure of Audit Fees. Working paper, University of Houston.
44. Schrand CM, Zechman SLC (2012) Executive overconfidence and the slippery slope to financial misreporting. J Acc Econ 53:311–329.
45. Schrand, C. M. & Zechman, S. L. (2011). Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53 (1-2), 311-29.
46. Sepasi, S, Anvari Rostami, A.A., Sayadi Soumar, A, (2016). Investigating the effect of managerial ability on financial restatements: with emphasis on Opportunistic Incentives. The Journal of Financial Accounting Knowledge, 2 (4): 89-110 (In Persian).
47. Simunic D (1980) The pricing of audit services: theory and evidence. J Acc Res 18(1):161–190.
48. Wang C, Raghunandan K, McEwen RA (2013) Non-timely 10-K filings and audit fees. Acc Horiz 27(4):737–755.
Financial Accounting Knowledge
Volume 7, Issue 3 - Serial Number 26
November 2020
Pages 85-110
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