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

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.