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

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

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 employslogistic regression and ordinary leastsquares(OLS) regressionsto 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.