The Effects of Endogenous Information Acquisition About Business Risk on Audit Pricing

A1.133 WP 187

Posted: 6 Dec 1997

See all articles by Phillip C. Stocken

Phillip C. Stocken

Dartmouth College - Tuck School of Business

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Date Written: September 1997

Abstract

This paper examines the pricing of business risk by homogeneous auditors in a two-period model. Incumbent auditors optimally determine the amount of information to acquire about the business risk of a client. They subsequently compete in prices with prospective auditors. In such an environment, we show that there exists differential auditor turnover between high and low risk firms; cross-subsidization of the audit fees of high risk firms by low risk firms; and low-balling by auditors.

JEL Classification: D44, M41, M49

Suggested Citation

Stocken, Phillip C. and Morgan, John, The Effects of Endogenous Information Acquisition About Business Risk on Audit Pricing (September 1997). A1.133 WP 187. Available at SSRN: https://ssrn.com/abstract=45282

Phillip C. Stocken

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

John Morgan (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

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