The Effects of Endogenous Information Acquisition About Business Risk on Audit Pricing
A1.133 WP 187
Posted: 6 Dec 1997
Date Written: September 1997
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: Suggested Citation