Shareholder Discontent and Audit Pricing: Evidence from Hedge Fund Activism

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 9: Audit Fees II

Abstract

Shareholder discontent can manifest itself in the form of hedge fund activism. There is currently a debate as to whether hedge fund activism provides long-term benefits, or leads to a transfer of wealth from other stakeholders to the hedge fund. Prior research suggests that hedge fund activism improves both financial reporting quality, and long-term operating performance, which may be associated with lower audit fees. However, other research on hedge fund activism and the cost of debt suggests that there is an increase in business risk associated with this type of activism. Using U.S. data for 2002 through 2011, I find that hedge fund activism is positively related to audit fees, consistent with greater levels of assessed risk. I also find that this relationship reverses for hedge funds seeking to improve the governance structure of the firm, consistent with auditors pricing hedge fund monitoring. Finally, I find that post-activism, audit fees are positively related to discretionary accruals, consistent with auditors increasing fees due to an increase in effort and risk assessment, versus hedge funds demanding greater audit services.

Author

• Pablo C Machado, University of Arizona-Tucson