Fa. Gul et Jsl. Tsui, A TEST OF THE FREE CASH FLOW AND DEBT MONITORING HYPOTHESES - EVIDENCE FROM AUDIT PRICING, Journal of accounting & economics, 24(2), 1997, pp. 219-237
This study examines the association between free cash flow (FCF) and a
udit fees. The association is expected given Jensen's argument that ma
nagers of low growth/high FCF firms engage in non-value-maximizing act
ivities. These activities increase auditors' assessments of inherent r
isk and, in turn, audit effort and fees. Jensen also argues debt mitig
ates the non-value-maximizing activities. Thus, the positive FCF/audit
fees association is expected to be weaker for low growth firms with h
igh debt than for similar firms with low debt. Regression results for
a sample of low growth Hong Kong firms support these hypotheses. (C) 1
998 Elsevier Science B.V. All rights reserved.