The impact of independent directors’ differential incentives on firms’ auditor choice

This study examines how independent directors' reputational incentives affect firms' demand for high-quality audit. We find that firms having a larger percentage of independent directors with low reputational concerns are more inclined to engage high-quality auditors. This evidence aligns with the notion that higher agency costs resulting from reduced monitoring by such directors increase firms' demand for enhanced third-party assurance. The relationship is attenuated in firms with stronger alternative governance mechanisms but is more pronounced in firms undergoing equity issuance. In addition, we document that high-quality auditors mitigate the adverse effects of independent directors' low reputational concerns on firms' financial reporting quality.