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Selection bias and the Big Four premium: New evidence using Heckman and matching models

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  • Mark Clatworthy
  • Gerald Makepeace
  • Michael Peel

Abstract

Many prior studies have found that large auditors charge significantly higher fees for statutory audit services, potentially resulting from higher audit quality and/or a lack of competition in the audit market. However, recent research using a Heckman two‐step procedure attributes the large auditor premium to auditor selection bias. In this paper we examine the limitations of the Heckman model and estimate the large auditor (Big Four) premium using decomposition and matching methods on a large sample of UK private companies. Our analysis suggests that Heckman two‐step estimates are highly sensitive to changes in sample and model specification, particularly the presence of a valid identifying variable. In contrast, the propensity score and portfolio matching methods we employ point to a persistent large auditor premium, consistent with the majority of previous studies. Conclusions of the premium vanishing when selection bias is controlled for therefore appear premature. Since the Heckman model is increasingly used in auditing and other areas of accounting research, our discussion and findings are likely to be of more general interest.

Suggested Citation

  • Mark Clatworthy & Gerald Makepeace & Michael Peel, 2009. "Selection bias and the Big Four premium: New evidence using Heckman and matching models," Accounting and Business Research, Taylor & Francis Journals, vol. 39(2), pages 139-166.
    • Handle: RePEc:taf:acctbr:v:39:y:2009:i:2:p:139-166
    DOI: 10.1080/00014788.2009.9663354
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    References listed on IDEAS

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    6. John E. Core, 2010. "Discussion of Chief Executive Officer Equity Incentives and Accounting Irregularities," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 273-287, May.
    7. Alhadab, Mohammad & Clacher, Iain, 2018. "The impact of audit quality on real and accrual earnings management around IPOs," The British Accounting Review, Elsevier, vol. 50(4), pages 442-461.
    8. Clatworthy, Mark A. & Peel, Michael J., 2021. "Reporting accountant appointments and accounting restatements: Evidence from UK private companies," The British Accounting Review, Elsevier, vol. 53(3).
    9. Manoel, Aviner Augusto Silva & Moraes, Marcelo Botelho da Casta & Santos, David Ferreira Lopes & Pündrich, Gabriel Pereira, 2021. "Audit quality and the cost of debt in private firms: evidence from the Brazilian sugarcane industry," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 25(1), July.
    10. Grey, Colette & Stathopoulos, Konstantinos & Walker, Martin, 2013. "The impact of executive pay on the disclosure of alternative earnings per share figures," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 227-236.
    11. Ann Vanstraelen & Caren Schelleman, 2017. "Auditing private companies: what do we know?," Accounting and Business Research, Taylor & Francis Journals, vol. 47(5), pages 565-584, July.
    12. De Fuentes, Cristina & Porcuna, Rubén, 2016. "Main drivers of consultancy services: A meta-analytic approach," Journal of Business Research, Elsevier, vol. 69(11), pages 4775-4780.
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    15. Thomas Jeanjean & Hervé Stolowy & Michael Erkens, 2010. "Really “Lost in translation”? The economic consequences of issuing an annual report in English," Post-Print hal-00479511, HAL.

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