Self-Selection of Auditors and Audit Pricing in Private Firms

49 Pages Posted: 7 Jun 2003

See all articles by Paul K. Chaney

Paul K. Chaney

Vanderbilt University - Accounting

Debra C. Jeter

Vanderbilt University - Accounting

Lakshmanan Shivakumar

London Business School

Date Written: February 17, 2003

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, and provide evidence that private firms do not pay such a premium on average. The relatively greater 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 to predict the auditor choice for each firm and to control for potential self-selection. We reject the null hypothesis that clients are randomly allocated across Big 5 and non-Big 5 auditors. Consistent with the extant literature, we document a Big 5 premium; however the premium vanishes once we control for self-selection bias. Moreover, we find that client firms choosing Big 5 auditors generally would have faced higher fees had they chosen non-Big 5 auditors, given their firm-specific characteristics. Our results are consistent with audit markets for private firms being segmented along cost-effective lines. Further, our results suggest that auditees in our setting do not, on average, view Big 5 auditors as superior in terms of the perceived quality of the services provided to a degree significant enough to warrant a fee premium.

Keywords: Big 5, fee premium, audit choice, private firms

JEL Classification: M49, M41

Suggested Citation

Chaney, Paul K. and Jeter, Debra C. and Shivakumar, Lakshmanan, Self-Selection of Auditors and Audit Pricing in Private Firms (February 17, 2003). Available at SSRN: https://ssrn.com/abstract=408400 or http://dx.doi.org/10.2139/ssrn.408400

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/

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