The Effects of Staggered Board on Audit Fees

This paper examines the effects of staggered boards on audit fees based on two contrary theories: managerial entrenchment view and shareholder interest view. According to the managerial entrenchment view, staggered boards adversely influence firm value because of their ineffective monitoring (Manne 1965). On the other hand, the shareholder interest view suggests that staggered boards play a significant role in enhancing firm value by providing a stable business environment and long-term commitment (Koppes et al. 1999). According to these contrary views, we posit that staggered boards are significantly associated with audit fees. Based on the shareholder interest view, we expect that the association between staggered boards and audit fees would be negative because staggered boards provide boards with stability and insulation from short-term pressure (Wilcox 2002), resulting in less audit risk (Chen et al. 1993). Less audit risk leads to less audit fees (Simunic 1980). As a consequence, the association between staggered boards and audit fees would be negative. On the basis of the managerial entrenchment view, we expect that the association between staggered boards and audit fees would be positive because staggered boards exhibit ineffective monitoring (Bebchuk and Cohen 2005), resulting in increasing audit risk (Tsui et al. 2001). More audit risk corresponds to more audit fees (Low et al. 1990). As a result, the association between staggered boards and audit fees would be positive. Using the sample of 3,334 firm-year observations in U.S from 2007 to 2013, we find that staggered boards are negatively associated with audit fees, supporting the shareholder interest view. Overall, our study indicates that staggered boards are important determinants of audit fees.