5. Conclusion
This study investigates whether executive tournament incentives influence auditor perceptions of risk. Prior research suggests that executives respond to tournament incentives by putting forth greater effort, which leads to better performance (e.g. Kale et al., 2009; Lazear & Rosen, 1981; Prendergast, 1999). However, prior research also finds that stronger tournament incentives are associated with greater performance misreporting (Conrads et al., 2014), more sabotage activities (Harbring & Irlenbusch, 2011), and a higher likelihood of fraud (Haß et al., 2015). We argue that auditors are likely to view tournament incentives as affecting audit risk and auditor business risk, leading to an impact on audit fees.
Our main sample consists of 8604 firm-year observations from the period of 2004–2014. We follow prior research (Haß et al., 2015; Kale et al., 2009; Kini & Williams, 2012; Kubick & Masli, 2016) to obtain three measures of executive tournament incentives. The results suggest that stronger tournament incentives are associated with higher audit fees. Specifically, the results indicate that audit fees are 3.90% higher when the strength of tournament incentives increases from the median to the 75th percentile. In addition, we find results suggesting that the relation between tournament incentives and audit fees is moderated by insider CEO succession, CEO tenure, CEO age, auditor tenure, and abnormal accruals.
