Effect of Management Ability and Corporate Governance Mechanisms on the Relationship between Managerial Overconfidence and Audit Fees

Financial statements approved by the auditor are the most important source of information for investors. Therefore, determining the audit fee with the company management decision is very important. Management also has characteristics that are considered in negotiation for audit fees. The purpose of this study is to investigate the effect of managers’ ability and corporate governance mechanisms on the relationship between managerial overconfidence and audit fees.

The research hypotheses were tested by collecting data from 124 companies listed in Tehran Stock Exchange and Farabours during the period 2014-2019. Management ability was measured using Demirjian et al.’s (2012) Data Envelopment Analysis (DEA) model and managerial overconfidence was also measured through the index of excess investment in the assets of Ahmed and Duelman’s (2013) model and corporate governance was also measured by the model introduced by Cassell et al. (2012) for the board of directors and audit committee  

According to research findings, management ability has a negative and significant effect on the relationship between managerial overconfidence and audit fees. But the effect of the board of directors and audit committee on the relationship between managerial overconfidence and audit fees were not significant.

This study revealed that managers with higher ability are more likely to reduce the risk of auditing , even in firms with managerial confidence .

Contribution: 

Since management overconfidence increases the risk of optimal decisions in the company, therefore by examining the significant impact of management ability and corporate governance mechanisms on audit fees in companies with overconfident managers, this study adds a new perspective to the literature of management characteristics and management relationships with auditor through audit fees.