Using 41,648 firm-year observations from 30 countries during the period 2000–2011, we investigate the relation between analyst coverage and audit fees. We also examine whether the adoption of International Financial Reporting Standards (IFRS) and shareholder protection at the country level interacts with analyst coverage to affect audit fees. We find that auditors charge firms higher fees when the firms have greater analyst coverage. This supports our argument pertaining to analyst pressure. The positive impact of analyst coverage on audit fees is weaker for firms that adopt IFRS and in countries where there is high shareholder protection. This study enhances an understanding of the effect of analyst coverage on audit fees in relation to IFRS adoption and shareholder protection levels in an international setting.
American Institute of Certified Public Accountants. (2002). Consideration of fraud in a financial statement audit (Statement on Auditing Standards [SAS] No. 99).
2.
BalakrishnanK.WattsR. L.ZuoL. (2016). The effect of accounting conservatism on corporate investment during the global financial crisis. Journal of Business Finance & Accounting, 43, 513–542.
3.
BarthE.HuttonA. P. (2004). Analyst earnings forecast revisions and the pricing of accruals. Review of Accounting Studies, 9, 59–96.
4.
BedardJ.JohnstoneK. (2004). Earnings manipulation risk, corporate governance, risk, and auditors’ planning and pricing decisions. The Accounting Review, 79(2), 277–304.
5.
BedardJ.JohnstoneK.SmithE. (2010). Audit quality indicators: A status update on possible public disclosures and insights from audit practice. Current Issues in Auditing, 4, C12–C19.
6.
BelseyD. A.KuhE.WelschE. R. (1980). Regression diagnostics identifying influential data and sources of collinearity. John Wiley.
7.
BeyerA.CohenD.LysT.WaltherB. (2010). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50, 296–343.
8.
BhushanR. (1989). Firm characteristics and analyst following. Journal of Accounting and Economics, 11, 255–274.
9.
BotosanC. A.HarrisM. S. (2000). Motivations for a change in disclosure frequency and its consequences: An examination of voluntary quarterly segment disclosures. Journal of Accounting Research, 38(2), 329–353.
10.
CarsonE. (2009). Industry specialization by global audit firms. The Accounting Review, 84, 355–382.
11.
ChanK.HameedA. (2006). Stock price synchronicity and analyst coverage in emerging markets. Journal of Financial Economics, 80(1), 115–147.
12.
ChoiJ. H.KimJ. B.LiuX.SimunicD. A. (2008). Audit pricing, legal liability regimes, and Big 4 premiums: Theory and cross-country evidence. Contemporary Accounting Research, 25(1), 55–99.
13.
ClementM. (1999). Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?Journal of Accounting and Economics, 27, 285–303.
14.
DaskeH.HailL.LeuzC.VerdiR. (2013). Adopting a label: Heterogeneity in the economic consequences around IAS/IFRS adoptions. Journal of Accounting Research, 51, 495–547.
15.
DechowP.DichevI. (2002). The quality of accruals and earnings: The role of accrual estimation errors.’The Accounting Review, 77, 35–59.
16.
DechowP.HuttonA.SloanR. (2000a). The relation between analysts’ forecasts of demand attributes. Contemporary Accounting Research, 23(1), 141–191.
17.
DechowP.HuttonA.SloanR. (2000b). The relation between analysts’ forecasts of long-term earnings growth and stock price performance following equity offerings. Contemporary Accounting Research, 17, 1–32.
18.
DerrienF.KecskésA. (2013). The real effects of financial shocks: Evidence from exogenous changes in analyst coverage. Journal of Finance, 68(4), 1407–1440.
19.
DyckA.MorseA.ZingalesL. (2010). Who blows the whistle on corporate fraud?Journal of Finance, 65(6), 2213–2253.
20.
DyckA.VolchkovaN.ZingalesL. (2008). Corporate governance role of the media: Evidence from Russia. Journal of Finance, 6(3), 1093–1136.
21.
EamesM.GloverS. (2003). Earnings predictability and the directing of analysts’ earnings forecast errors. The Accounting Review, 7(3), 707–724.
22.
ErkensD. H.HungM.MatosP. (2012). Corporate governance in the 2007-2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389–411.
23.
FanJ. P. H.WongT. J. (2005). Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. Journal of Accounting Research, 43(1), 35–72.
GillanS. L. (2006). Recent developments in corporate governance: An overview. Journal of Corporate Finance, 16, 381–402.
26.
GompersP. A.IshiiJ.MetrickA. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107–155.
27.
GongG.KeB.YuY. (2013). Home country investor protection, ownership structure and cross-listed firms’ compliance with SOX-mandated internal control deficiency disclosures. Contemporary Accounting Research, 30(4), 1490–1523.
28.
GottiG.HanS.HiggsJ.KangT. (2012). Managerial stock ownership, analyst coverage and audit fee. Journal of Accounting, Auditing and Finance, 27(3), 412–437.
29.
GriffinP. A.LontD. H.SunY. (2008). Corporate governance and audit fees: Evidence of countervailing relations. Journal of Contemporary Accounting and Economics, 4(1), 18–49.
30.
HayD. C.KnechelW. R.WongN. (2006). Audit fees: A meta-analysis of the effect of supply and demand attributes. Contemporary Accounting Research, 17, 1–32.
31.
HealyP.PalepuK. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440.
32.
HealyP. M.JamesM. W. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13, 365–383.
33.
HiggsJ. L.SkantzT. R. (2006). Audit and nonaudit fees and the market’s reaction to earnings announcements. Auditing: A Journal of Practice & Theory, 25(1), 1–26.
34.
HongH.LimT.SteinJ. (2000). Bad news travels slowly: Size, analyst coverage and the profitability of momentum strategies. Journal of Finance, 55(1), 265–295.
35.
HortonJ.SerafeimG.SerafeimI. (2013). Does mandatory IFRS adoption improve the information environment?Contemporary Accounting Research, 30(1), 388–423.
36.
JensenM. C.MecklingW. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
37.
KeuneM. B.JohnstoneK. M. (2012). Materiality judgments and the resolution of detected misstatements: The role of managers, auditors and audit committees. The Accounting Review, 87(5), 1641–1677.
38.
KhuranaI. K.RamanK. (2004). Litigation risk and the financial reporting credibility of big 4 versus non big 4 audits: Evidence from Anglo American countries. The Accounting Review, 79(2), 47–495.
39.
KimJ. B.LiuX.ZhengL. (2012). The impact of IFRS adoption on audit fees: Theory and evidence. The Accounting Review, 87(6), 2061–2094.
40.
KimJ. B.ShiH. (2012a). IFRS reporting, firm-specific information flows, and institutional environments: International evidence. Review of Accounting Studies, 17, 474–517.
41.
KimJ. B.ShiH. (2012b). Voluntary IFRS adoption, analyst coverage, and information quality: International evidence. Journal of International Accounting Research, 11(1), 45–76.
42.
KnyazevaD. (2007). Corporate governance, analyst following and firm behavior [Working Paper]. Simon School of Business, University of Rochester, Rochester, NY.
43.
KrossW.RoB.SchroederD. (1990). Earnings expectations: The analysts’ information advantage. The Accounting Review, 65, 461–476.
44.
LangM. H.LinsK. V.MillerD. P. (2003). ADRs, analysts, and accuracy: Does cross listing in the United States improve a firm’s information environment and increase market value?Journal of Accounting Research, 41(2), 317–345.
45.
LangM. H.LinsK. V.MillerD. P. (2004). Concentrated control, analyst following and valuation: Do analysts matter most when investors are protected least?Journal of Accounting Research, 42(3), 589–623.
46.
LangM. H.LundholmR. J. (1996). Corporate disclosure policy and analyst behavior. The Accounting Review, 71, 467–492.
47.
LaPortaR.Lopez-De-SilanesF.ShleiferA.VishnyR. W. (1998). Law and finance. Journal of Political Economy, 106, 1113–1150.
48.
LarckerD. F.RusticusT. O. (2010). On the use of instrumental variables in accounting research. Journal of Accounting and Economics, 49, 186–205.
49.
MikhailM.WaltherB.WillisR. (2007). When security analysts talk, who listens?The Accounting Review, 82(5), 1227–1253.
50.
MorckR.YeungB.YuW. (2000). The information content of stock markets: Why do emerging markets have synchronous stock price movements?Journal of Financial Economics, 59, 215–260.
51.
NewtonN. J. (2019). When analysts speak, do auditors listen?Auditing: A Journal of Practice & Theory, 38(1), 221–245.
52.
NuysK. V. (1995). Corporate governance through the proxy process: Evidence from the 1989 Honeywell proxy solicitation. Journal of Financial Economics, 34(1), 101–132.
53.
PrattJ.SticeJ. D. (1994). The effects of client characteristics on auditor litigation risk judgments, required audit evidence, and recommended audit fees. The Accounting Review, 69(4), 639–656.
54.
PreiatoJ.BrownP.TarcaA. (2013). Mandatory IFRS and analysts’ forecasts: How much does enforcement matter? [Working Paper]. University of New South Wales, Sydney, Australia.
55.
Public Company Accounting Oversight Board. (2010). Identifying and assessing risks of material misstatement (Auditing Standard No. 12).
56.
SimunicD. (1980). The pricing of audit services: Theory and evidence. Journal of Accounting Research, 18(1), 161–190.
57.
TaylorM. H.SimonD. T. (1999). Determinants of audit fees: The importance of litigation, disclosure and regulatory burdens in audit engagements in 20 countries. International Journal of Auditing, 34(3), 375–388.
58.
TsuiJ. S. L.JaggiB.GulF. A. (2001). CEO domination, growth opportunities, and their impact to audit fees. Journal of Accounting Auditing and Finance, 16(3), 183–203.
