Does Option Trading Affect Audit Pricing?

65 Pages Posted: 31 Oct 2018 Last revised: 4 Sep 2020

See all articles by Muhammad Jahangir Ali

Muhammad Jahangir Ali

La Trobe University - Department of Accounting and Management

Balasingham Balachandran

Dept of Economics, Finance and Marketing, La Trobe Business School, La Trobe University; Financial Research Network (FIRN)

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Premkanth Puwanenthiren

Westminster University

Michael Theobald

University of Birmingham - Department of Accounting and Finance

Date Written: August 2, 2020

Abstract

We examine the impact of options trading on audit pricing for a sample of US firms over the period from 2001 to 2016. Using two option trading measures, the average daily natural logarithm of option contracts volume and the average daily natural logarithm of option contracts dollar volume, we find that option trading is significantly and negatively related to audit fees, indicating that firms with higher option trading incur lower audit fees. We conduct several additional tests to establish the robustness of the causal relation between option trading and audit fees. Using difference-in-difference analysis, we document that firms which had options listed for the first time experience a significant decrease in their audit fees after the options listing relative to a matched sample of firms without listed options. Further, we find that auditors spend a lower number of days to audit firms with higher option trading and firms with higher option trading experience lower probabilities of lawsuits and misstatements. The impact of option trading on audit fees is stronger when the auditor is located further away from the audited firm, for firms with non-specialized auditors and for firms with higher information asymmetry problems, poorer earnings and governance quality. Our findings underscore the significance of option trading in improving a firm’s information environment and reducing litigation risk, thereby enabling firms with higher option trading levels to negotiate lower audit fees than firms with lower option trading.

Keywords: Audit Fees; Option Trading; Information Asymmetry; Agency Costs, Governance; Earnings Quality

JEL Classification: G14; M41; M42

Suggested Citation

Ali, Muhammad Jahangir and Balachandran, Balasingham and Duong, Huu Nhan and Puwanenthiren, Premkanth and Theobald, Michael F., Does Option Trading Affect Audit Pricing? (August 2, 2020). Available at SSRN: https://ssrn.com/abstract=3184286 or http://dx.doi.org/10.2139/ssrn.3184286

Muhammad Jahangir Ali

La Trobe University - Department of Accounting and Management ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

Balasingham Balachandran (Contact Author)

Dept of Economics, Finance and Marketing, La Trobe Business School, La Trobe University ( email )

Dept of Economics, Finance and Marketing,
La Trobe Business School, La Trobe University
Bundoora, Victoria 3086
Australia
+61394793103 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Premkanth Puwanenthiren

Westminster University ( email )

London
London, 3086
United Kingdom

Michael F. Theobald

University of Birmingham - Department of Accounting and Finance ( email )

Birmingham B15 2TT
United Kingdom
0121 414 6678 (Fax)

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