Managerial Overconfidence,Auditor Selection And Audit Fees

Traditional financial theories are based on the assumption of "rational man",but with the development of the economics,there is more and more phenomenon which the traditional financial theories can't explain.Therefore,more and more researchers start to focus on the irrational behaviors in the running of companies.Among all the fields,managers' irrational behaviors are the most obvious in the process of company decision.Managers always have their own ability,high social status and more achievements,so they are easy to be overconfident.In the process of company decision,the overconfidence of managers will let them be overly optimistic about their company's future.Because of the information asymmetry and principal-agent issues that exist between the owner and the managers of the company,overconfident managers will make irrational decisions for their own profit.For example,they will lead to extreme investment and financing decisions and low-level accounting conservatism.Anyway,managerial overconfidence is a hidden danger in the running of a company and it may lead to serious consequences even the bankruptcy.Therefore,apart from the existing studies,in the process of company running,the communication between overconfident managers and external part is also worth of attention.Among this communication,auditing is the key part,so we focus on the influence of managerial overconfidence on auditing.In detail,executive have motivation to select auditors for the existing of imperfect audit committees and insider control of companies,and they own the power to select(Tao Wang,2004;Ming Zhang,2010;Duellman,2015).So,optimistic executive are tend to choose those auditors who can help to achieve their own interests.And different choice of auditors will intuitively bring about the change of audit fees.Usually,when high-quality auditors are chosen,companies should pay more and when low-quality auditors are chosen,they don't need to pay too much.But special cases are that when there is a conspiracy between an accounting firm and a company.When a conspiracy happens,audit fees may unusually high(Mingqi Luo and Huan Zhao,2014;Yu Wang and Xiaolong Yang,2014;Shaohong Mou,2014).Therefore,we focus on audit fees and we choose the A shares between 2007 and 2015 on the board of Shanghai and Shenzhen to discuss the influence and conduction path between executive overconfidence and audit fees.Go a step further,we study the influence of executive power and the strong audit committee.The results show that executive power will strengthen the relationship between executive overconfidence and audit fees and the strong audit committee will weaken this relationship.At last,we change the measures of executive overconfidence and audit committee to retest this relationship.Meanwhile,we use the PSM as robustness test,the results turns out to be robust.These results expand the studies of managerial overconfidence and audit fees and there is a certain inspiration for the economic consequences of executive powers and the oversight role of the audit committee.