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Panel Cointegration Analysis of Audit Pricing Model

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  • Win Chou

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  • Dominica Lee

    ()

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    Abstract

    This paper addresses two issues that arise from testing and estimating cointegration in accounting research. The first issue is the failure to use more powerful cointegration tests by earlier researchers. This has led to the problem of low test power in the cointegration procedures employed in the earlier accounting literature. Another issue that has not received much attention in earlier studies of audit pricing is the endogeneity bias that arises from the endogenous nature of the regressors. Commonly used regressors such as auditee size and auditee complexity are endogenous and are often related to audit fees through a system of simultaneous equations. Endogeneity bias suggests that the conventional OLS estimators are biased. Using more powerful panel sample estimation procedures, we find that elasticities of total assets are in general under-estimated in the earlier studies when the conventional OLS method was used. We also find that the earlier studies tend to under-state the effects of the foreign subsidiary ratio and over-state the effect of the ratio of account receivables to total assets on audit fees. Copyright Springer Science + Business Media, Inc. 2005

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 24 (2005)
    Issue (Month): 4 (June)
    Pages: 423-439

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    Handle: RePEc:kap:rqfnac:v:24:y:2005:i:4:p:423-439

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: audit fee model; bias-correction estimation methods; panel cointegration;

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    1. repec:fth:calaec:6-99 is not listed on IDEAS
    2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    3. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
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    15. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
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