The Impact of Nonaudit Service Fee Levels on Investors' Perceptions of Auditor Independence

Abstract

We extend Dopuch, King and Schwartz (2003) by examining the effect of various fee ratios on investor perception of auditor independence and market behavior. Consistent with Dopuch et al. (2003), we find disclosure of nonaudit fees reduces the accuracy of investor perception of auditor independence. More importantly, we document that the proportionate level of nonaudit fees to total fees has a varying impact on investor perception of auditor independence and market behavior. In particular, there appears to be a non-linear effect between investor perception of auditor independence and market behavior. In summary, when investors perceive auditor independence is impaired, as a result of the level of nonaudit fees, more asset pricing inefficiencies occur in these experimental markets.

Keywords: nonaudit fees disclosure, investor perceptions, market efficiency, belief persistence

JEL Classification: M4, M40, M41, M49