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Disclosure of fees paid to auditors and the market valuation of earnings surprises

Author

Listed:
  • Jere R. Francis

    (University of Missouri–Columbia)

  • Bin Ke

    (The Pennsylvania State University)

Abstract

We investigate if the SEC’s recently mandated disclosure of fees for audit and nonaudit services paid by firms to their incumbent auditors affected the market’s perception of auditor independence and earnings quality. Following the initial fee disclosures in 2001, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) was significantly lower for firms with high levels of nonaudit fees than for firms with low levels of such fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information that was viewed by the market as relevant to appraising auditor independence and earnings quality.

Suggested Citation

  • Jere R. Francis & Bin Ke, 2006. "Disclosure of fees paid to auditors and the market valuation of earnings surprises," Review of Accounting Studies, Springer, vol. 11(4), pages 495-523, December.
    • Handle: RePEc:spr:reaccs:v:11:y:2006:i:4:d:10.1007_s11142-006-9014-z
    DOI: 10.1007/s11142-006-9014-z
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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