The Coverage of Investor-paid Rating Agency and Audit Pricing

This paper examines how credit rating agencies affect audit fee. We find robust evidence that the coverage of investor-paid rating agency increases audit fee. The coverage of investor-paid rating agency increases bad news disclosure and makes the tone of media reports on the firm more negative. Auditors get informed and more aware of the firm’s risk, resulting in higher audit fee. Our findings suggest that the monitoring roles of auditors and credit rating agencies are complementary to each other. The cross-sectional analyses suggest that the effect of investor-paid rating agency on audit fee is more prominent for firms with high risk and poor corporate governance. To sum up, the coverage of investor-paid rating agency has a spillover effect on other participants in capital markets.