The Relation between Excess Audit Fees and Credit Ratings

57 Pages Posted: 1 Jul 2016 Last revised: 29 Nov 2016

See all articles by Valentina Bruno

Valentina Bruno

American University - Department of Finance and Real Estate

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Gopal V. Krishnan

Bentley University

Date Written: November 28, 2016

Abstract

Credit rating agencies and auditors are complementary certification agents subject to a conflict of interest inherent in their compensation structure. We examine client firm credit ratings to test alternative hypotheses of abnormal audit fees. We predict and find both cross-sectional and time series variation in our results. Excess audit fees are associated with less favorable credit ratings, but only among speculative grade issuers. Among firms certified investment grade, we find evidence of economic bonding: excess fees are associated with more favorable ratings. As predicted by economic theory, economic bonding effects obtain during economic expansions when the probability of consequence is low. During economic contractions – when audit failure and ratings inflation are more likely consequential – certification agents protect their reputation value. Overall, our results suggest that excess compensation paid to one certifying agent might be useful to learn about the actions of the other.

Keywords: Audit Fees, Credit Ratings, Economic Bonding, Information Intermediary

JEL Classification: G24, G28, M42

Suggested Citation

Bruno, Valentina Giulia and Cornaggia, Kimberly Rodgers and Krishnan, Gopal, The Relation between Excess Audit Fees and Credit Ratings (November 28, 2016). Available at SSRN: https://ssrn.com/abstract=2803321 or http://dx.doi.org/10.2139/ssrn.2803321

Valentina Giulia Bruno

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

HOME PAGE: http://www.american.edu/kogod/faculty/bruno.cfm

Kimberly Rodgers Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

Gopal Krishnan

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
141
Abstract Views
531
rank
202,997
PlumX Metrics