Review of Accounting Studies

, Volume 11, Issue 4, pp 495–523 | Cite as

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

Article

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.

Keywords

Nonaudit fees Auditor independence Earnings quality Earnings response coefficients 

JEL Classification

G14 G38 M41 M42 

Notes

Acknowledgements

Jere Francis is an Honorary Professorial Fellow at the University of Melbourne. We thank two anonymous referees for their constructive suggestions, as well as Susan Parker, workshop participants at University of Cincinnati, Michigan State University, University of Tennessee, and participants at the 2003 annual meeting of the American Accounting Association. Finally, we appreciate the research assistance of Santhosh Ramalingegowda and thank I/B/E/S for providing the earnings forecast data.

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Copyright information

© Springer Science+Business Media, LLC 2006

Authors and Affiliations

  1. 1.College of BusinessUniversity of Missouri–ColumbiaColumbiaUSA
  2. 2.The Smeal College of Business AdministrationThe Pennsylvania State UniversityUniversity ParkUSA

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