The Impact of Managers’ Risk Aversion and Loss Aversion on Audit Quality Demand

We use experimental economic markets to investigate the impact of risk aversion and loss aversion on managers’ demand for audit quality. We posit that managers’ audit quality preferences are influenced by contextual factors that are often not considered or are difficult to isolate in prior research. We specifically predict and find evidence that risk aversion significantly reduces managers’ average demand for audit quality, and that risk aversion and loss aversion and their interaction reduce managers’ likelihood of hiring the best available auditor in the market. In supplemental analyses, we show that our results are robust to several alternative economic and psychological explanations.