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Auditor Fees, Market Microstructure, and Firm Transparency

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  • Bartley R. Danielsen
  • Robert A. Van Ness
  • Richard S. Warr

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.

Suggested Citation

  • Bartley R. Danielsen & Robert A. Van Ness & Richard S. Warr, 2007. "Auditor Fees, Market Microstructure, and Firm Transparency," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 202-221, January.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:1-2:p:202-221
    DOI: 10.1111/j.1468-5957.2006.00652.x
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    3. Cheng, Zijian & Liu, Zhangxin (Frank) & Wang, Isabel Zhe & Zhao, Xingju, 2024. "Reverse merger audit fee premium: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 94(C).
    4. Janis Berzins & Øyvind Bøhren & Bogdan Stacescu, 2018. "Shareholder Conflicts and Dividends [A theory of dividends based on tax clienteles]," Review of Finance, European Finance Association, vol. 22(5), pages 1807-1840.
    5. Gu, Junjian, 2021. "FDI characteristics, industry homogeneity, and audit fees in Japanese multinationals," Journal of Multinational Financial Management, Elsevier, vol. 61(C).
    6. Wenxia Ge & Jeong‐Bon Kim, 2020. "How does the executive pay gap influence audit fees? The roles of R&D investment and institutional ownership," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 677-707, May.
    7. Minfeng Yu & Yi Si & Gaoliang Tian & Lei Zhang, 2023. "Climate risk and audit fees: An international study," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 4989-5025, December.
    8. Engel, Ellen & Hayes, Rachel M. & Wang, Xue, 2010. "Audit committee compensation and the demand for monitoring of the financial reporting process," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 136-154, February.

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