Managerial Shareholding and Compensation Structure, Investment Opportunities and Non-Audit Service Purchases: An Alternative Explanation

The rise of fees paid to incumbent auditors for non-audit services (NAS) relative to audit fees has been actively debated by the accounting profession, investors, and regulators. Although accounting firms are banned by the Sarbanes-Oxley Act from providing non-auditing services to their auditees, the debate is far from over. Despite the negative publicity generated by NAS purchases, why do managers continue to purchase increasing quantities of NAS? We contribute to this debate by offering an alternative explanation on determinants of NAS purchase decisions. We find that (1) the association between NAS purchases and earnings management documented in extant literature is affected by the way top managers are compensated and by managers' shareholdings, and (2) NAS purchases are positively associated with the proportion of performance-based compensation paid to the top five executives and this association is more pronounced for firms with high investment opportunities.