Article2002

The Large Audit Firm Fee Premium: A Case of Selectivity Bias?

186 citations0/0 files storedJournal of Accounting Auditing & Finance

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Audit fee studies often find large (Big 5) audit firms earn significantly higher fees than small (non-Big 5) firms, but they treat auditor choice as exogenous. In contrast, this paper takes into account that companies are not randomly assigned to audit firms. We find the effects of auditor selection bias on audit fees are statistically and economically significant. Consistent with the predictions of analytical research, our results suggest large (small) audit firms experience advantageous (adverse) selection in attracting high (low) quality companies. Our results indicate the premium earned by large audit firms is more than twice as large when selectivity effects are taken into account (53.4% compared to 19.2%).

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References

1983Limited-dependent and qualitative variables in econometrics 1980The Pricing of Audit Services: Theory and Evidence 1996Corporate Disclosure Policy and Analyst Behavior.1995Auditor brand name reputations and industry specializations 1986Information quality and the valuation of new issues 1986Audit Fees and Auditor Size: Further Evidence 1994The Relationship Between the Comprehensiveness of Corporate Annual Reports and Firm Characteristics in Spain 1995Firm-specific determinants of the comprehensiveness of mandatory disclosure in the corporate annual reports of firms listed on the stock exchange of Hong Kong

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