Does Option Trading Affect Audit Pricing?
51 Pages Posted: 31 Oct 2018 Last revised: 2 Dec 2018
Date Written: Dec 2, 2018
We find that option trading negatively and significantly affects audit fees. The results are robust using a variety of methods to address potential endogeneity issues. Further, we find that higher option trading results in less auditor effort and lower probability 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, for auditors with early years of audit tenure, and for firms with higher information asymmetry problems, poorer earnings and governance quality. Overall, our findings underscore the significance of option trading in improving a firm’s information environment, thereby reducing the fees charged by auditors.
Keywords: Audit Fees; Option Trading; Information Asymmetry; Agency Costs, Governance; Earnings Quality.
JEL Classification: G14, M41, M42
Suggested Citation: Suggested Citation