Disclosure of Fees Paid to Auditors and the Market Valuation of Earnings Surprises
Posted: 17 Jan 2006
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Disclosure of Fees Paid to Auditors and the Market Valuation of Earnings Surprises
Abstract
We investigate if the SEC's mandated disclosure of fees for audit and nonaudit services affected the market's perception of auditor independence and earnings quality. Following the initial fee disclosures, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) is significantly lower for firms with high levels of nonaudit fees than for firms with low levels of nonaudit fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information and was viewed by the market as lowering the perception of auditor independence and earnings quality.
Keywords: nonaudit fees, auditor independence, earnings quality, earnings response coefficients
JEL Classification: G12, G14, G38, M41, M49
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