The presence of local CEO, clan culture and audit pricing: Evidence from China

Abstract

This paper examines whether the presence of local CEOs affects audit risk assessment and audit fees. Using a sample of Chinese listed firms, we find that firms managed by local CEOs pay lower audit fees and stronger clan culture weakens the relationship between the presence of local CEOs and audit fees. We show that the presence of local CEOs is associated with lower performance volatility and higher accounting information quality. Moreover, the firms managed by local CEOs are more likely to have local major clients. These findings suggest that lower business and audit risks are reasons for auditors charging lower audit fees to firms managed by local CEOs. Our results are robust after conducting a variety of endogeneity tests. Overall, our findings suggest that CEO locality is an important non-contractual factor affecting audit pricing.