| The corporate governance research is an important topic in academia all along. Since Jensen and Meckling proposed agency cost theory, the corporate governance research has also launched a series of profound and innovative researches, of which the most representative study is Hypothesis of Free Cash Flow proposed by Jensen in 1986. As an important branch of agency cost theory, it has become one of the core concepts of cooperate finance theory. According to Hypothesis of Free Cash Flow, for the companies with high free cash flow and low growth, the management is likely to trigger over-investment and produce non-optimal costs, maybe it also lead the management to raise the rent and in-service consumption level or create their own "empire" and so on. In other words, the management tends to manipulate the financial statements to cover up agency costs resulting in the agency costs of free cash flow. In response, academia developed a number of studies on the issue of free cash flow agency and its constraint mechanism. So far, the studies have been carried out from the perspective of over-investment, corporate value, stock issuance, audit costs and so on. The majority results support Jensen's basic point of view, that is, the existence of free cash flow leads the management to make sub-optimal decisions that will reduce the value of the company (Lang et al.1991, Harford 1999).However, the study from the perspective of audit pricing to research free cash flow and the validity of its constraint system is relatively weak. Representative is Gul's and Tsui's researches in 1998 and 2001, according to which the existence of free cash flow results in the increase of audit risk and the improvement of audit efforts that finally reflected in the rise of audit costs to compensate for the additional audit risk and the audit efforts. While the empirical result shows that the free cash flow of low-growth companies has significant positive correlation with the audit costs. Meanwhile, the report points out that the management of the high free cash flow and low-growing company tends to non-optimal investment and attempts to gloss over the financial statements to cover up their non-optimal investment behaviors. Therefore, auditors will increase audit costs to cover the additional risks they bearing. Gulf (1998) and Tsui (2001) has also verified Debt Control Hypothesis proposed by Jensen; the empirical result also shows that the existence of the debt weakens the positive correlation between free cash flow and audit costs. While, Ferguson and Taylor (2007) oppugn the positive correlation between free cash flow and audit costs. They have not found any evidence of the positive correlation between them and also have not discovered that the debt does ease the issue of free cash flow. We could find that there are significant differences in previous studies about the relation between free cash flow agency problem and audit costs, so which is one of the purposes of this study.The aim of this paper is to ascertain whether the issue of free cash flow has impact on audit pricing with an expectation of validation the existence of free cash flow problem and the validity of its constraint mechanism from the audit pricing view and targeted on Chinese listed companies. Besides that, the actual situation of China is also taken into account; the study extends the previous ideas and scope. It has certain enlightening and referencing meanings for China's modern corporate governance and it is helpful to China's listed companies to enhance the corporate value and its global competitiveness.There are five chapters in this study, chapter 1 is introduction, chapter two is literature review, chapter three is theoretical analysis and research hypotheses, chapter four is empirical research, chapter five is the policy recommendations and research deficits.Chapter 1 is introduction. This chapter mainly introduces the research background, the selection of the topic, the research contributions, the research's ideas, methods and its framework.Chapter 2 is literature review. This chapter respectively summarizes and simply reviews the relative studies of audit pricing, free cash flow agency problem and its constraints mechanism both in domestic and abroad. The result shows that: on the one hand, the direct studies of audit pricing have been quite mature and rich; however, the studies about the impacts of clients' orporate governance and other factors on the audit pricing seem to be rather weak. The study of company's agency problem is the core of corporate governance. Therefore, adding the audit agency cost variable into audit pricing is an improvement and a perfection of this field. On the other hand, I believe that the development of the researches on free cash flow agency problem and its constraint mechanisms lack of depth and with a short time. Most studies imitate foreign studies and are exploring studies. At the same time, the studies on the issue of free cash flow agency and its constraint mechanisms from the audit pricing view are rare and not very systemic. Therefore, this article combines the actual situation of China's listed companies, systemically studies the issue of free cash flow agency and its constraint mechanisms from the audit pricing view.Chapter 3 is theoretical analysis and research hypotheses. As the core theoretical support for this paper, this chapter is divided into three parts. The first part deeply explains the rise of Hypothesis of Free Cash and its main view, besides that,it analyzes and puts the development path of agency theory into order. The, part two analyzes the theory of the external audit requirements from agency cost theory. That part of the analysis provides a strong theoretical support for the combination study between the agency issue, constraint mechanisms and audit pricing. Part three is the deduction process of the main hypotheses. Through detailed and rigorous theoretical analysis, this paper puts forward the following six assumptions that is needed to build models and test in the empirical part:(1) regardless the growth of the company, the audit pricing of listed companies with high level of free cash flow is higher than that with low level. (2) In the same conditions, the audit pricing of the listed company with high free cash flow and low debt is higher than that with high free cash flow and high debt. (3) In the same conditions, the audit pricing of the listed company with high free cash flow and low level of cash divided is higher than that with high free cash flow and high level of cash divided. (4) In the same conditions, the audit pricing of the listed company with high free cash flow and low proportion of independent directors is higher than that with high free cash flow and high proportion of independent directors. (5) Compared with the high free cash flow and non-state-owned listed company, the audit pricing of high free cash flow and state-owned listed company is relatively high in China. (6) In the same consideration, the audit pricing of the listed company with high free cash flow and low level of management ownership is higher than that with high free cash flow and high level of management ownership.Chapter 4 is empirical research. This chapter is divided into three parts, namely, empirical research design, empirical testing and analysis, robustness tests. The first part explains the data source, sample selection, model variable selection and model design, etc. The second part is empirical test and the result analysis including descriptive statistical analysis, correlation analysis between variables, T test of audit pricing analysis of different standard classification and multivariate regression analysis. The main test results are as follows:firstly, the correlation analysis between variables proves that the indicators used to explain the dependent variables are appropriate, which gets the supports of Pearson correlation test to a certain extent. At the same time, from the relevant test symbols, the correlation coefficient results of the main independent variables are broadly in line with the assumption. Secondly, the T-test analysis of audit pricing that based on free cash flow and the median growth to grouping shows that the enterprise audit pricing with high free cash flow is higher than the low free cash flow business. Because of the existence of free cash flow agency issues, auditors face greater risks and, spend more resources resulting in enhancing the audit pricing'of listed companies with high free cash flow. T test of audit pricing based on the median of the main dependent variable to grouping shows that there has correlation in a certain significance level between the main test variables, control variables and audit pricing. Finally, multivariate regression analysis shows that on the one hand, free cash flow positively correlates with the audit pricing in the relationship test between tested variables and audit pricing; the growth of the company has positive relation with audit pricing as well as the relation between long-term capital debt ratio and audit pricing; the interest rate of common stock negatively correlates with audit pricing. These results are consistent with the expected results. However, the relation between the proportion of independent directors and audit pricing is not significant; non-state nature of the listed company has positive correlation with audit pricing in the 1% significance level, which is contrary to expectation in this article; the relation symbols between the proportion of management ownership and audit pricing is in line with the expectation, but the regression results are not significant. On the other hand, in order to test the validity of the constraint mechanism of free cash flow agency problem (debt, cash dividends, board governance, the nature of the ultimate controlling shareholder and management shareholders, etc.), the interaction item between the measure LHFCF of free cash flow agency problem and the corresponding measure of restraint mechanism (LongD, Dividend, Indep, Gov, Mshares) is added in this paper. This item reflects the positive correlation between free cash flow and audit pricing whether will be weakened because of the existence of the related constraints mechanism. In all of the interactive regression results, only the interactive result of regression coefficient between LongD and LHFCF is negative in the 5% level as the expectation of this article, other interactive regression coefficients are not significant. Rigorous analysis and interpretation of the result has been put forward. In the third part, robustness test of the result is carried through, which validates the results of the empirical part again.Chapter 5 is policy proposals and research deficit. Based on the above study results, the corresponding policy recommendations are raised. It includes improving decision-making science to prevent blind investment, fully playing the control effects of debt to inhibit free cash flow agency problem, appropriately increasing cash dividends to play its binding effect, standardizing independent director system to demonstrate its effectiveness, improving the governance structure of state-owned listed companies to reduce their free cash flow agency costs and reasonably increasing the proportion of management's shareholding to play its role in governance. At the same time, it also points out the defect at the end of the paper.Compared with existing studies, the main innovations of this study are as follows:1. The innovation of the content:from the point of audit pricing, it verifies the quick-tempered restraint mechanism's effectiveness of free cash flow agency problem in China's listed companies based on the specific market and institutional background of China. Besides that, this study combines the actual situation of China's listed companies, who has the Chinese characters providing theoretical support for the governance of the free cash flow issue in China as well as generating inspiration on the practice. On the one hand, empirical testing is proposed in this paper for testing the free cash flow existence model of listed companies in China. On the other hand, through empirical research, from the perspective of the audit pricing, this paper tests the effectiveness of the restraint mechanism of free cash flow agency, provides the corresponding empirical evidence and analyzes the empirical result. Related binding mechanisms include debt control constraint, cash dividend constraint, the supervision and incentive in internal governance, etc. For the corporate governance monitoring mechanism referred in the paper is board corporate governance and the nature of the ultimate controlling shareholder, etc. Incentives refer to the management stock ownership plan.2. The innovation of hypotheses:one hypothesis in this paper is that if the company owns high free cash flow, no matter high-growth or low growth company, there is a relatively rise in audit pricing since the existence of free cash flow problem. Unlike previous studies (Jensen,1986; Gul and Tsui,1998, etc.), this paper not only extends Hypothesis of Free Cash Flow (Jensen,1986), but also provides a breakthrough in the governance of free cash flow problem. This assumption is also verified by the empirical result.3. The innovation of research model:this article bases on the study of the relative researches, combines the characters of China's listed companies, which improves the existed models enhancing the level of demonstration and persuasion. In particular, this paper systematically and fully considers the relevant factors affecting the audit pricing. At the same time, it introduces the interactive options between the variables that measure the binding mechanisms and LHFCF items with the aim that testing the positive relation between free cash flow and audit pricing whether is to weaken since the existence of the related binding mechanisms. The control variables include the logarithm of the company's total assets, quick ratio, liquidity ratio, whether it is the ST companies, the absolute value of annual non-recurring gains and losses, the ratio of ending total assets, the total return of assets, the size of accounting firms, the type of audit opinions, annual control variables and so on. |
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