Reputation Capital of Directorships and Audit Quality Evidence from the Analysis of Board Centrality and Audit Fees.

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Abstract

The aim of this paper is to investigate the relationship between reputation capital of directors and the demand for audit quality. It takes time to build reputation capital, but it is easily destroyed as many corporate scandals have shown us. One way that the directors can protect their reputation capital against these scandals is to invest in external monitoring such as high quality financial statement audits. Building on social networks literature, we argue that directors’ reputation capital increases with the number of directorships they hold. We hypothesize and find evidence that the companies that are more connected to other companies through board of directors, demand for higher audit quality. More specifically, using data for Finnish listed companies over the period 2007-2016, we document that the quantity of board connections are positively related to our measure of audit quality, fees paid to the audit firm. We do not find similar results for the quality of those connections.

Authors

• Antti Fredriksson, Turku School of Economics

• anila kiran, Aalto University

• Lasse Niemi, Aalto University