LGBT(Lesbian, Gay, Bisexual, and Transgender)- Supportive Corporate Policy and Audit Fee

Abstract

This study investigates the relationship between Lesbian, Gay, Bisexual, and Transgender (LGBT) supportive corporate policy and audit pricing using U.S. firms’ data from 2000 to 2011. Prior studies show that firms embracing diversity, including LGBT-supportive policy, enhances credit rating and earnings quality. Despite its growing importance of diversityrelated LGBT-supportive policy, less attention is paid to the LGBT-supportive firms and its effect on audit pricing. Our results suggest that, LGBT-supportive firms demand high audit quality and pay higher audit fee than firms that do not adopt LGBT-supportive policies. We conduct instrumental variable analyses and propensity score matching analyses to mitigate endogeneity and test results reinforce our main results. Further we find that LGBT-supportive firms appoint city-level industry specialist auditors, which supports our audit demand hypothesis. Overall results suggest that LGBT-supportive firms demand high-quality audit and pay high audit fees by appointing high-quality auditors to provide transparent and reliable financial information which would satisfy various stakeholders‘ information needs. Our study has practical and policy implications for auditors and regulators by identifying new determinants of audit fee and auditor choice decisions using U.S. data.