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Auditor Fees, Market Microstructure, and Firm Transparency

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  • Bartley R. Danielsen
  • Robert A. Van Ness
  • Richard S. Warr

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. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Bartley R. Danielsen & Robert A. Van Ness & Richard S. Warr, 2007. "Auditor Fees, Market Microstructure, and Firm Transparency," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1-2), pages 202-221.
  • Handle: RePEc:bla:jbfnac:v:34:y:2007-01:i:1-2:p:202-221
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    References listed on IDEAS

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    1. Rick Antle & Elizabeth A. Gordon & Ganapathi Narayanamoorthy & Ling Zhou, 2002. "The Joint Determination of Audit Fees, Non-Audit Fees, and Abnormal Accruals," Yale School of Management Working Papers ysm289, Yale School of Management.
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    Cited by:

    1. repec:eee:reacre:v:25:y:2013:i:1:p:30-40 is not listed on IDEAS
    2. Bartley R. Danielsen & David M. Harrison & Robert A. Van Ness & Richard S. Warr, 2009. "REIT Auditor Fees and Financial Market Transparency," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(3), pages 515-557.
    3. repec:bla:acctfi:v:57:y:2017:i:2:p:565-595 is not listed on IDEAS
    4. Engel, Ellen & Hayes, Rachel M. & Wang, Xue, 2010. "Audit committee compensation and the demand for monitoring of the financial reporting process," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 136-154, February.

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