Does Option Trading Affect Audit Pricing?

51 Pages Posted: 31 Oct 2018 Last revised: 2 Dec 2018

See all articles by Muhammad Jahangir Ali

Muhammad Jahangir Ali

La Trobe University - Department of Accounting and Management

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Huu Nhan Duong

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

Premkanth Puwanenthiren

Roehampton University

Michael Theobald

University of Birmingham - Department of Accounting and Finance

Date Written: Dec 2, 2018

Abstract

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

Ali, Muhammad Jahangir and Balachandran, Balasingham and Duong, Huu Nhan and Puwanenthiren, Premkanth and Theobald, Michael F., Does Option Trading Affect Audit Pricing? (Dec 2, 2018). 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)

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

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

Roehampton University ( email )

Erasmus House, Roehampton Ln
London, SW15 5PU
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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