Board Networks and Audit Fees

This paper studies whether board connectedness affects audit fees. We find that firms with well-connected boards pay higher audit fees. This result is robust to the exogenous variation in board connectedness due to directors’ death and retirement, an instrumental variable approach, and propensity score matching. We further observe that, relative to firms with poorly connected boards, firms with well-connected boards are more complex, have higher litigation risk, and prefer higher audit quality, which requires greater audit effort that auditors price into fees. In addition, we show that the effect is stronger in a more complex auditing environment and when government economic policy uncertainty is high. Collectively, our study extends the understanding of the consequential effect of board networks on audit fees and adds to the extant literature investigating the factors influencing the pricing of audit services.