Does Option Trading Affect Audit Pricing?
71 Pages Posted: 31 Oct 2018 Last revised: 9 Sep 2022
Date Written: May 12, 2022
We examine the impact of options trading on audit pricing for a sample of US firms over the period from 2004 to 2016. We find that option trading is significantly and negatively related to audit fees, indicating that firms characterized by higher option trading incur lower audit fees. We conduct several additional tests to establish the robustness of the relation between option trading and audit fees. Using difference-in-difference analysis, we document that firms which had options listed for the first time experienced 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. Overall, 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: Suggested Citation