Does CEO age matter in auditor choice and audit pricing? The role of CEO dominance

Article

Ferdous, Lutfa Tilat, Bose, Sudipta, Shams, Syed and Azizkhani, Masoud. 2024. "Does CEO age matter in auditor choice and audit pricing? The role of CEO dominance ." Journal of Accounting Literature. https://doi.org/10.1108/jal-09-2023-0169
Article Title

Does CEO age matter in auditor choice and audit pricing? The role of CEO dominance

ERA Journal ID19098
Article CategoryArticle
AuthorsFerdous, Lutfa Tilat, Bose, Sudipta, Shams, Syed and Azizkhani, Masoud
Journal TitleJournal of Accounting Literature
Number of Pages40
Year2024
PublisherEmerald
Place of PublicationUnited Kingdom
ISSN0737-4607
Digital Object Identifier (DOI)https://doi.org/10.1108/jal-09-2023-0169
Web Address (URL)https://www.emerald.com/insight/content/doi/10.1108/jal-09-2023-0169/full/html?casa_token=Of3RqG8kDiAAAAAA%3ACkXrPWz-GCpEhQdrkS9urgfvGSc3snKKMpd-5v4CvdRF5pD2fnvAjAyXyTQCqZg-VsxlHs8PuFiXoczb7igEpZRWqOASl6tVoLf4qAzKkf-AtPiLaNHN8w
Abstract

Purpose
This study examines the impact of the age of the chief executive officer (CEO) on the demand for audit quality, as reflected in auditor choice and audit fees. Furthermore, the study investigates whether CEO dominance moderates the association between CEO age, auditor choice and audit fees.

Design/methodology/approach
Using a sample of 14,066 firm-year observations from 2000 to 2017, the study employs logistic regression and ordinary least squares (OLS) regressions to estimate the research models. The study also employs various techniques to address the endogeneity issue in the findings.

Findings
Using industry specialist auditors and brand name (Big 4) auditors as proxies, the study finds that firms with older CEOs are more likely to appoint higher-quality auditors. The study also finds that firms with older CEOs pay higher audit fees than firms with younger CEOs, which is likely to be due to increased demand for higher-quality audits and to risk aversion among older CEOs. In addition, the study finds that CEO dominance attenuates the positive association of CEO age with auditor choice and audit fees. The findings are found to be robust in our analyses, which address the endogeneity issue with firm fixed effects, two-stage least squares (2SLS) regression and entropy balancing. In addition, the study provides evidence that the positive association between CEO age and audit pricing persists when firms replace younger CEOs with older CEOs.

Research limitations/implications
The study’s findings suggest that the United States (US) Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) may need to be more cautious when monitoring financial statements from firms with younger CEOs.

Originality/value
This study contributes to a growing stream of research investigating the links between managers’ idiosyncratic age differences and the quality of financial reporting and corporate decisions.

KeywordsAuditor choice; CEO dominance; CEO age; Audit risk; Audit pricing
Contains Sensitive ContentDoes not contain sensitive content
ANZSRC Field of Research 2020350199. Accounting, auditing and accountability not elsewhere classified
Public Notes

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Byline AffiliationsUniversity of Leicester, United Kingdom
University of Newcastle
School of Business
Australian National Development Index, Australia
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