The pricing of audit services and the effects of audit market size

Official URL: http://risc01.sabanciuniv.edu/record=b1606665 (Table of Contents)

The purpose of this study is to examine the relation between audit fees and market size (proxied by the sum of client sizes domiciled in a city) using the data of Australian Stock exchange (ASX) listed companies. An Ordinary Least Squares (OLS) regression model and a client fixed effect model are applied to empirically test the relation between audit fees and market size. The client fixed effect model is used to control for omitted variable bias. Within this framework I apply two different audit fees measures as dependent variables and two groups of independent variables having different market size measures. This gives rise to eight different models. It is found that the relation between market size and audit fees is positively correlated and economically important. For example a one standard deviation increase in the market size of total assets leads to an increase in audit fees of about 6.47 percent. All of the found results are in line with previous published research by Hay, 2005; Sewon, O, and Kun Wang; Francis et al. 2005; Ferguson et al. 2003.