Mutual fund herding and audit pricing |
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Affiliation: | 1. School of Management, Xiamen University, Xiamen 361005, China;2. School of Business, Soochow University, Taipei 100, Taiwan;3. Nottingham University Business School China, University of Nottingham Ningbo, Ningbo 315100, China;4. School of Management, Xi’an Jiaotong University, Xi’an 710049, China;5. Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue, Singapore |
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Abstract: | This study investigates how investor trading behavior affects audit pricing by examining mutual fund herding in specific. When mutual fund managers herd due to information cascade, mimicking incentive, or agency problem, it causes information friction and weakens their monitoring effectiveness. Heightened governance risk is associated with higher audit risk and thus higher audit pricing. In our empirical tests, we find that herding weakens mutual funds’ information advantage and monitoring effectiveness, ultimately resulting in higher audit fees. To mitigate the endogeneity concern, we employ the natural experiment of the 2004 SEC regulation change on mutual fund disclosure frequency to capture exogenous change in herding intensity. Our findings are robust using propensity score matching method and alternative measures. Consistent with our conjecture, we document that firms facing stronger mutual fund herding are associated with deteriorated corporate disclosure quality. |
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Keywords: | Mutual fund Herding Information Audit fees |
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