Audit Pricing in Private Firms

London Business School Accounting Subject Area No. 011

51 Pages Posted: 26 Mar 2002

See all articles by Paul K. Chaney

Paul K. Chaney

Vanderbilt University - Accounting

Debra C. Jeter

Vanderbilt University - Accounting

Lakshmanan Shivakumar

London Business School

Abstract

Prior research has examined audit pricing for publicly held firms and provided some evidence of a Big 8 premium in pricing. We investigate audit pricing among private firms for the first time, and we compare audit pricing for private and listed clients. The relatively great degree of dispersion in auditor choice (between Big 5 and non-Big 5 auditors) in our large sample of privately held audit clients allows us the opportunity to estimate the predicted auditor choice for each firm. We present evidence that when the auditor choice variable is separated into an expected and a surprise component, the expected component shows no evidence of a Big 5 premium while the surprise component bears such a premium in some cases. We suggest that when the choice variable is not separated into these components, the endogeneity of audit fees and audit attributes is likely to result in parameter identification and/or estimation bias problems, which prevents meaningful interpretation of variable coefficients. Based on the methodology applied, we conclude that the majority of Big 5 clients (large or small) do not pay a premium for their auditor choice, but only those clients making unexpected or surprising auditor choices. This evidence is inconsistent with the reputation and deep pockets arguments for the existence of a Big 5 premium.

JEL Classification: M49, L84

Suggested Citation

Chaney, Paul K. and Jeter, Debra C. and Shivakumar, Lakshmanan, Audit Pricing in Private Firms. London Business School Accounting Subject Area No. 011, Available at SSRN: https://ssrn.com/abstract=304941 or http://dx.doi.org/10.2139/ssrn.304941

Paul K. Chaney

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

Debra C. Jeter

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

Lakshmanan Shivakumar (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,471
Abstract Views
6,780
rank
13,401
PlumX Metrics