Self-Selection of Auditors and Audit Pricing in Private Firms
Top Cited Papers
- 1 January 2004
- journal article
- Published by American Accounting Association in The Accounting Review
- Vol. 79 (1), 51-72
- https://doi.org/10.2308/accr.2004.79.1.51
Abstract
Prior research has examined audit pricing for publicly held firms and provided some evidence of a Big 8 premium in pricing. We investigate audit pricing among private firms, and provide evidence that private firms do not pay such a premium on average. The relatively greater degree of dispersion in auditor choice (between Big 5 and non-Big 5 auditors) in our large sample of privately held audit clients allows us to predict the auditor choice for each firm and to control for potential self-selection. We reject the null hypothesis that clients are randomly allocated across Big 5 and non-Big 5 auditors. Using standard OLS regressions, we document a Big 5 premium; however this premium vanishes once we control for self-selection bias. Moreover, we find that client firms choosing Big 5 auditors generally would have faced higher fees had they chosen non-Big 5 auditors, given their firm-specific characteristics. Our results are consistent with audit markets for private firms being segmented along cost-effective lines. Further, our results suggest that auditees in our setting do not, on average, view Big 5 auditors as superior in terms of the perceived quality of the services provided to a degree significant enough to warrant a fee premium.Keywords
This publication has 20 references indexed in Scilit:
- Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industryJournal of Accounting and Economics, 2003
- Earnings Management to Avoid Earnings Declines across Publicly and Privately Held BanksThe Accounting Review, 2002
- Agency Costs and Ownership StructureThe Journal of Finance, 2000
- Simultaneous Estimation of the Supply and Demand of Differentiated Audits: Evidence from the Municipal Audit MarketJournal of Accounting Research, 1995
- Accounting information and internal performance evaluation: Evidence from Texas banksJournal of Accounting and Economics, 1994
- DETERMINANTS OF AUDIT FEES FOR QUOTED UK COMPANIESJournal of Business Finance & Accounting, 1993
- The role of audits and audit quality in valuing new issuesJournal of Accounting and Economics, 1991
- Audit Prices, Product Differentiation, and Scale Economies: Further Evidence from the Australian MarketJournal of Accounting Research, 1986
- The effect of audit firm size on audit pricesJournal of Accounting and Economics, 1984
- Separation of Ownership and ControlThe Journal of Law and Economics, 1983