The Big 4 Premium: A Long Gone Phenomenon?

Abstract

This paper presents new evidence on the effects of an auditor change on audit pricing, in particular the Big 4 premium. We link the fields of research on fee cutting and the Big 4 premium and examine whether the Big 4 premium is influenced by a firm’s decision to change its auditor. Applying matching analysis, we compare audit fees of firms that switch to a Big 4 auditor to those switching to a non-Big 4 auditor. Comparing these results to non-switching firms, both for Big 4 and non-Big 4 audited firms, we find that audit pricing strongly differs for existing versus new clients of Big 4 auditors. We find that the Big 4 premium only exists for mandates where firms do not change their auditor, whereas in the case of an auditor change, we find that Big 4 auditors are willing to give up their premium or even accept lower fees than non-Big 4 auditors. Further, this discount prevails in most post-change years. Consequently, we conclude that Big 4 auditors apply a foot-in-the-door strategy and demand lower fees to win new clients. Therefore, researchers as well as practitioners should consider in their future work that the existence of the well-known Big 4 premium is strongly influenced by a firm’s decision to change its auditor. These findings are not limited to a single country as our data set includes all listed German, Italian, Belgian and Finnish firms from 2007 to 2010 while addressing country-specific characteristics by exact matching, i.e. comparing firm observations only from the same country.

Keywords: Audit fees, audit pricing, Big 4 premium, fee cutting, matching

JEL Classification: C32, M40, M41, M42