The Effect of the Audit Fee Type on Investment Cash Flow Sensitivity

Abstract

Objective: The phenomenon of investment cash-flow sensitivity is strongly affected by information asymmetry and agency conflict. The use of auditors to reduce such problems is therefore necessary because auditors make greater efforts to reduce the audit risks associated with the investment cash-flow sensitivity, which improves the audit quality, facilitates external financing, and reduces the investment cash-flow sensitivity. Methods: To achieve the study objectives, a total of 112 firms listed in the Tehran Stock Exchange for the period of 2009-2016 were selected, and the study hypotheses were assessed using multivariate regression analysis with fixed effects. Results: The results confirmed that the firms listed in the Tehran Stock Exchange are sensitive to investment cash-flow, and ordinarynormal audit fees have a reducing effect on the level of investment cash-flow sensitivity, while higherabnormal audit fees increase the severity of investment cash-flow sensitivity. Conclusion: It is expected that auditors reduce the audit risk associated with investment cash-flow sensitivity by making extra efforts, and demand higher fees for their efforts. Therefore, by increasing the credibility of financial statements, the problem of information asymmetry and agency conflict will be reduced, and firms can easily use external financing. It is also possible that because of their financial dependence on the client, auditors will be reluctant to make the extra efforts to reduce the audit risk associated with investment cash-flow sensitivity. This intensifies information asymmetry and the agency conflict, and because of the poor audit quality, external financing will be costlier than internal financing, and investment cash-flow sensitivity will increase.

Keywords

• Investment cash flow sensitivity
• Normal audit fee
• Abnormal audit fee