What type of study is this?

This is a Quantitative Study study.

September 24, 2025

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

Puntos clave

Firms with more independent directors lacking reputational concerns are inclined to hire high-quality auditors, indicating a critical link.
The analysis shows that the demand for quality audit services increases with higher agency costs due to reduced monitoring by independent directors.
Firms with strong governance mechanisms experience a weaker relationship between independent directors' reputational incentives and auditor choice.
High-quality auditors help improve the financial reporting quality, particularly in firms with independent directors facing low reputational concerns.

Resumen

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.

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