Auditors' response to analysts' forecast properties : some evidence from audit pricing

Abstract

This study draws on information asymmetry theory and audit pricing theory to examine the link between analyst earnings forecasts and audit pricing in the U.S. For the empirical tests, information asymmetry is measured in two ways: (1) the lag of analysts' forecast accuracy (LAGACCY), and (2) the lag of analysts' forecast dispersion (LAGDSP). Using data from 2000 to 2012, this thesis finds that higher analyst earnings forecast accuracy (dispersion) is associated with lower (higher) audit fees. These findings are consistent with the theory that analysts, as important financial intermediaries, provide useful information to third parties, including auditors. Further, the results suggest that these associations are stronger (1) for small firms, and (2) for younger firms, consistent with theory that such firms have higher information asymetry. Finally, it is found that the association between audit fees and LAGACCY and LAGDSP are insignificant for firms that are audited by industry specialists. This finding provides support that auditor industry specialization plays a part in reducing information asymetry with these audit firm types being less reliant on information provided by financial analysts.