Do Industry Leading Auditors Earn Fee Premia?
49 Pages Posted: 23 May 2015 Last revised: 18 Dec 2016
Date Written: December 16, 2016
We argue that conflicting estimates of auditors’ industry leadership premia documented in prior research reflect model misspecification. We show that leadership measures can be expected to identify different auditors as leaders depending on the basis (assets, fees or auditee counts) used to measure leadership. To correctly estimate premia to any of these multiple types of leaders, estimation models must include a full set of indicators for leaders by all admissible bases at each admissible level (national, local or joint national-and-local), which prior studies fail to do. Using such an estimation model and including controls for local market factors ignored in prior research, we find that premia are primarily associated with local market leadership. Local fee-only leaders (leaders by audit fees but not by assets audited or auditee count) charge substantial premia, local asset-only and local count-only leaders offer significant discounts, while local leaders by various combinations of these three bases price somewhere in between. Our study provides a framework for future research to correctly estimate leadership premia when industry leadership by different bases and levels vests in different auditors.
Keywords: Audit fees, Audit fee premia, Audit industry leadership or specialization, Auditor location
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