Managerial Incentives and Audit Fees: Evidence from the Mutual Fund Industry
TL;DR: This article examined the relation between audit fees and managerial incentives in the mutual fund industry and found that audit fees are higher when managerial incentives are poor, and that managerial incentives were correlated with audit fees.
Abstract: We examine the relation between audit fees and managerial incentives in the mutual fund industry. Using proxies for managerial incentives based on fund organizational form, advisor compensation, and fund expenses, we find that audit fees are higher when managerial incentives are poor. Our results represent new evidence on the relation between audit fees and managerial incentives.
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TL;DR: In this article, the authors examined the association between audit committees, compensation incentives and corporate audit fees in Pakistan by using the data of fifty firms that are listed on the Karachi Stock Exchange (KSE), Pakistan during the years of 2007-2011.
30 citations
Cites background from "Managerial Incentives and Audit Fee..."
...Shah et al. (2011) in their study explored the determinants of CEO compensation in transitional economy....
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...Ross Booth et al. (2012) Managerial incentives and audit fees SEC investment companies/USA/2010 Audit fees is higher when managerial incentives...
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TL;DR: In this paper, the authors consider the mathematical transformations used for assets of different valuation complexity in audit fee models and find that more complexly valued assets are less likely to follow the traditional log transformation.
Abstract: SUMMARY: We consider the mathematical transformations used for assets of different valuation complexity in audit fee models. These mathematical transformations (such as logs and square roots) relate to the non-linear relationship between client size and audit fees. We use closed-end mutual fund audits to examine this question because virtually all fund assets are reported at fair value. We find that more complexly valued assets are less likely to follow the traditional log transformation because the presence of these assets has a stronger relationship with audit fees that is not fully captured by the coefficient on the logged variable alone. The significance of non-size variables was also found to differ in audit fee models of both closed-end funds and a broad-based sample of public companies when the mathematical transformation of size variables was permitted to vary. These results suggest that the non-linear relationship between client size and audit fees may not always be sufficiently captured by a log...
5 citations
TL;DR: In this article, the authors assess whether the liquidity of a closed-end mutual fund's investments is related to the management fee charged by the fund's investment advisor and find a significantly positive relationship between the percentage of level 3 assets (the least liquid securities) and management fees.
Abstract: In this study, we assess whether the liquidity of a closed-end mutual fund’s investments (measured based on the fund’s fair value disclosures) is related to the management fee charged by the fund’s investment advisor. We posit that there will be incremental effort on the part of the advisor to identify and analyze less liquid investments, and that fund investors would be willing to pay for these incremental costs to access less-liquid segments of the market. Consistent with this expectation, we find a significantly positive relationship between the percentage of level 3 assets (the least liquid securities) and management fees. However, we do not find a significant relationship between level 2 securities (which are more liquid than level 3, but less liquid than level 1) and management fees. Overall, our results suggest that investments in the least liquid securities result in higher management fees.
2 citations
Posted Content•
01 Jan 2014
TL;DR: In this paper, the authors investigated the relationship between institutional ownership and audit fees in 50 firms listed in Tehran Stack Exchange and found that there is no meaningful relationship between the two factors.
Abstract: Institutional owners possess a large portion of the company stocks. Regarding the separation of the ownership from the management in a firm, the pivotal role of these owners in controlling and monitoring the management of the firms becomes more prominent. Since, audit fees is an important issue both for the managers and independent auditors, so this study aims at investigating the relationship between institutional ownership and audit fees in 50 firms listed in Tehran Stack Exchange. Time span for this study has been specified between 2008 to 2012. The analysis of the data is carried out by using Eviews software. At the end, it was found that there is no a meaningful relationship between institutional ownership and audit fees..
1 citations
References
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TL;DR: This article found that the speed and efficacy of a fund's actions to protect shareholders from dilution is negatively correlated with its expense ratios and the share of insiders on its board, suggesting that agency problems may be the root cause of the arbitrage problem.
Abstract: As is becoming increasingly widely known, mutual funds often calculate their net asset values (NAVs) using stale prices, which causes their daily returns to be predictable. By trading on this predictability, investors can earn 35--70% per year in international funds and 10--25% in asset classes such as small-cap equity and high-yield and convertible bonds. These abnormal returns come at the expense of long-term shareholders, dilution of whom has grown in international funds from 56 basis points in 1998--99 to 114 basis points in 2001. Despite these losses and pressure from the Securities and Exchange Commission (SEC), the vast majority of funds are not market-updating their prices to eliminate NAV predictability and dilution, but are instead pursuing solutions that are only partly effective. The speed and efficacy of a fund's actions to protect shareholders from dilution is negatively correlated with its expense ratios and the share of insiders on its board, suggesting that agency problems may be the root cause of the arbitrage problem. Copyright 2003, Oxford University Press.
128 citations
TL;DR: In this article, the authors show that closed-end fund share prices begin to generate statistically significant positive abnormal returns well in advance of the formal announcement of the open-ending, and that such market price performance is broadly consistent with a semi-strong form efficient market.
123 citations
TL;DR: In this article, the authors investigated the structure of audit fees paid by 100 North Carolina county governments during the period 1980-84 and found statistically significant associations between audit fees and political factors, consistent with results reported elsewhere for state governments.
Abstract: This study investigates the structure of audit fees paid by the 100 North Carolina county governments during the period 1980-84. The data analysis is designed to document the characteristics of this specific audit environment and to facilitate two kinds of comparisons with prior results for other markets for audit services. First, we relate differences in audit fees to differences in the financial and political characteristics of the county governments. Second, we investigate the structure of audit fees in the years surrounding a change in auditor. The relations between fees and the financial and political factors are addressed by a cross-sectional analysis of the counties' mean audit fees. The results indicate statistically significant associations between audit fees and political factors, consistent with results reported elsewhere for state governments (Baber [1983]), and between audit fees and outstanding debt, consistent with results reported for municipal governments (Rubin [1987]). A cross-sectional, time-series analysis of audit fee changes indicates that audit fees for initial engagements that follow an auditor switch are significantly less than fees for engagements that do not follow an auditor switch. These results contradict prior results for
122 citations
TL;DR: In this paper, the authors examined the relationship between the premium on closed-end funds and organizational features of the funds and advisors, including the compensation scheme of the investment advisor, and found that the fund premium is larger when: (a) the advisor's compensation is more sensitive to fund performance; (b) the assets managed by the advisor are concentrated in the fund in question; (c) the advisors manage other funds with low compensation sensitivity to performance and with low concentration of assets managed in the advisor; and (d) the Advisor's compensation contract evaluates performance relative to a
Abstract: This paper examines the relation between the premium on closed-end funds and organizational features of the funds and advisors, including the compensation scheme of the investment advisor. We find that the fund premium is larger when: (a) the advisor's compensation is more sensitive to fund performance; (b) the assets managed by the advisor are concentrated in the fund in question; (c) the advisor manages other funds with low compensation sensitivity to performance and with low concentration of assets managed by the advisor; and (d) the advisor's compensation contract evaluates performance relative to a benchmark. THE GROWTH IN ASSETS UNDER MANAGEMENT by investment companies has motivated both theoretical and empirical interest in the contractual relationship between portfolio managers and their clients.1 This paper considers how the interaction between organization structure, managerial incentives, and managerial behavior determines pricing of shares of closed-end funds. In particular, we examine how the form of the compensation scheme of the fund advisor/manager and the extent to which the assets managed by the fund advisor are spread across multiple funds are related to the premium at which a closed-end fund trades.
117 citations
95 citations