Auditor Fees, Market Microstructure, and Firm Transparency |
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| Authors: | Bartley R Danielsen Robert A Van Ness Richard S Warr |
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| Institution: | The first and third authors are from the College of Management, North Carolina State University. The second author is from the School of Business Administration, University of Mississippi. They wish to thank Dan Simunic and Marilyn Johnson for examining previous versions of this study and for in-depth discussions concerning auditor fee determinants, and seminar participants at North Carolina State University. Robert Van Ness acknowledges support from a Hearin Foundation grant, School of Business Administration, the University of Mississippi. |
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| Abstract: | Abstract: Auditors, as corporate insiders, have access to private information regarding the firm's financial and business opacity that is unavailable to outside investors. We test whether auditors price their knowledge of firm opacity in their audit fees by examining two competing hypotheses. The first states that higher audit fees may reflect the greater risk that the auditor faces in auditing an opaque firm. Under this hypothesis, market based measures of opacity will be positively correlated with higher fees. The second hypothesis states that firms buy reputational capital from their auditor by paying high fees in an attempt to improve the market's perception of the firm's transparency. In this case, higher audit fees are negatively correlated with market based measures of opacity. Our results are consistent with the first hypothesis, that auditors price opacity risk into their fees. |
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| Keywords: | market microstructure opacity audit fees |
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