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The Big 4 premium: Does it survive an auditor change? Evidence from Europe

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  • Fleischer, Rouven
  • Goettsche, Max
  • Schauer, Maximilian

Abstract

This study presents new evidence on the effects of auditor changes on audit pricing, with a particular focus on the Big 4 premium. We link the fee cutting and Big 4 premium research fields and examine whether the Big 4 premium is influenced by a firm’s decision to change its auditor. Applying matching analysis, we compare the audit fees of firms switching to a Big 4 auditor with those switching to a non-Big 4 auditor. Compared with non-switching firms, we find that audit pricing strongly differs for existing versus new clients of Big 4 auditors. The Big 4 premium only exists for mandates in which firms do not change their auditor, whereas upon auditor changes Big 4 auditors are willing to give up their premium or even accept lower fees than non-Big 4 auditors. This discount prevails in most post-change years. We conclude that Big 4 auditors apply a foot-in-the-door strategy and request lower fees to win new clients. Therefore, the existence of the well-known Big 4 premium is strongly influenced by a firm's decision to change its auditor. These findings are based on a data set including all listed German, Italian, Belgian, and Finnish firms from 2007 to 2010.

Suggested Citation

  • Fleischer, Rouven & Goettsche, Max & Schauer, Maximilian, 2017. "The Big 4 premium: Does it survive an auditor change? Evidence from Europe," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 29(C), pages 103-117.
    • Handle: RePEc:eee:jiaata:v:29:y:2017:i:c:p:103-117
    DOI: 10.1016/j.intaccaudtax.2017.10.002
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