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Excess cash holding and audit pricing: a further consideration of precautionary motives and other factors

Jayalakshmy Ramachandran (Nottingham University Business School, University of Nottingham Malaysia, Semenyih, Malaysia)
Yezen H. Kannan (Accounting Department, Zayed University, Dubai, UAE)
Samuel Jebaraj Benjamin (School of Accounting, Finance and Economics Waikato Management School, University of Waikato, Hamilton, New Zealand)

Meditari Accountancy Research

ISSN: 2049-372X

Article publication date: 18 August 2022

Issue publication date: 13 October 2023

257

Abstract

Purpose

This paper aims to investigate auditors’ pricing of excess cash holdings and the variation in their pricing decisions in light of the precautionary motives of cash holdings and certain firm-specific conditions and during periods of crisis.

Design/methodology/approach

The authors conduct the two-stage-least-squares multivariate analysis using a sample of publicly listed non-financial US firms for the period 2003 to 2021 (42,413 firm-year observations).

Findings

The findings show a significant positive relationship between excess cash and audit fee. Next, the authors find that audit pricing of excess cash is significantly higher for firms with lower financial constraints. However, the authors do not find evidence to suggest that auditors price excess cash significantly higher for firms with lower hedging needs. In additional analysis, the authors find evidence to suggest that auditors charge significantly less for excess cash in firms that report financial loss and firms operating in industries with high litigation risk. The additional analysis also reveals excess cash is not positively and significantly priced by auditors as a result of the global financial crisis and Covid-19 pandemic.

Originality/value

Most researchers have analyzed excess cash holding from the perspective of managers, i.e. agency conflict or managerial prudence, while somewhat neglecting auditors’ perception of the embedded risk of excess cash holdings. The authors provide new insights on auditors’ perspective of excess cash holding and identify certain factors/situation/conditions that cause variation in the audit fee premium. The findings offer useful insights for managers and shareholders who are interested in assessing the effects of excess cash holdings policies on the audit fee premium.

Keywords

Acknowledgements

The authors would like to thank Associate Editor Professor David Hay and two anonymous reviewers for their useful feedback.

Citation

Ramachandran, J., Kannan, Y.H. and Benjamin, S.J. (2023), "Excess cash holding and audit pricing: a further consideration of precautionary motives and other factors", Meditari Accountancy Research, Vol. 31 No. 5, pp. 1410-1435. https://doi.org/10.1108/MEDAR-10-2021-1456

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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