Auditor Fees, Market Microstructure, and Firm Transparency

20 Pages Posted: 1 Mar 2007

See all articles by Bartley R. Danielsen

Bartley R. Danielsen

North Carolina State University - Poole College of Management

Robert A. Van Ness

University of Mississippi - Department of Finance

Richard S. Warr

North Carolina State University

Abstract

Auditors, as corporate insiders, have access to private information regarding the firm's financial and business opacity that is unavailable to outside investors. We test whether auditors price their knowledge of firm opacity in their audit fees by examining two competing hypotheses. The first states that higher audit fees may reflect the greater risk that the auditor faces in auditing an opaque firm. Under this hypothesis, market based measures of opacity will be positively correlated with higher fees. The second hypothesis states that firms buy reputational capital from their auditor by paying high fees in an attempt to improve the market's perception of the firm's transparency. In this case, higher audit fees are negatively correlated with market based measures of opacity. Our results are consistent with the first hypothesis, that auditors price opacity risk into their fees.

Suggested Citation

Danielsen, Bartley R. and Van Ness, Robert A. and Warr, Richard S., Auditor Fees, Market Microstructure, and Firm Transparency. Journal of Business Finance & Accounting, Vol. 34, No. 1-2, pp. 202-221, January/March 2007. Available at SSRN: https://ssrn.com/abstract=966485 or http://dx.doi.org/10.1111/j.1468-5957.2006.00652.x

Bartley R. Danielsen

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States
919-513-3003 (Phone)

Robert A. Van Ness (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

Richard S. Warr

North Carolina State University ( email )

BOX 7229
Raleigh, NC 27695-7229
United States
919-513-4646 (Phone)
919-515-6943 (Fax)

HOME PAGE: http://www4.ncsu.edu/~rswarr/

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