Author(s): Sandra Alves
This study examines the relationship between free cash flow (FCF) and audit fees using the FCF theory of Jensen (1986). Additionally, we examine whether the level of leverage moderates the relationship between FCF and audit fees. This study uses OLS regression model to examine the effect of FCF on audit fees and to test whether leverage levels moderate that relationship for samples of Portuguese and Spanish listed companies for the period 2010-2018. Consistent with the FCF hypothesis of Jensen (1986), this study suggests that firms with high FCF pay more audit fees. Further, the results also suggest that the positive impact of FCF on audit fees progressively reduces at higher levels of leverage. This study contributes to the literature by examining how FCF affects the audit pricing and by shedding light on the mediating effect of leverage on the relationship between FCF and audit fees.