CEO salary gap, board gender diversity and audit quality: UK experience

Abstract

This study investigates the relationship between CEO salary gaps and audit quality, focusing on auditor size (Big 4) and audit fees. Additionally, it examines the moderating role of board gender diversity (BGD) in shaping these relationships. The current study utilizes a sample of 384 UK firms from the industry, energy, and basic materials sectors, constructing an unbalanced panel of 3,840 firm-year observations covering the period 2014-2023. The study uses Logit regression and Generalized Least Squares to provide empirical insights into the impact of CEO salary gap on audit quality. The findings of the study suggest that firms with a larger CEO salary gap are more likely to recruit the Big 4 auditors, and these auditors are more inclined to charge high audit fees, potentially leading to improved audit quality. Moreover, the findings indicate that BGD plays an active role in moderating the relationship between CEO salary gap and both Big 4 auditors and audit fees. This research extends existing studies by investigating how CEO compensation disparities influence audit decisions, a topic that has not been fully explored in prior literature. Second, it addresses the underexplored moderating role of board gender diversity in shaping the relationship between CEO salary gaps and audit quality. By incorporating board gender diversity as a moderating variable, the study provides a more nuanced understanding of how diversity shapes corporate governance outcomes.