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The Big 4 premium: Does it survive an auditor change? Evidence from Europe

Rouven Fleischer, Max Goettsche and Maximilian Schauer

Journal of International Accounting, Auditing and Taxation, 2017, vol. 29, issue C, 103-117

Abstract: This study presents new evidence on the effects of auditor changes on audit pricing, with a particular focus on the Big 4 premium. We link the fee cutting and Big 4 premium research fields and examine whether the Big 4 premium is influenced by a firm’s decision to change its auditor. Applying matching analysis, we compare the audit fees of firms switching to a Big 4 auditor with those switching to a non-Big 4 auditor. Compared with non-switching firms, we find that audit pricing strongly differs for existing versus new clients of Big 4 auditors. The Big 4 premium only exists for mandates in which firms do not change their auditor, whereas upon auditor changes Big 4 auditors are willing to give up their premium or even accept lower fees than non-Big 4 auditors. This discount prevails in most post-change years. We conclude that Big 4 auditors apply a foot-in-the-door strategy and request lower fees to win new clients. Therefore, the existence of the well-known Big 4 premium is strongly influenced by a firm's decision to change its auditor. These findings are based on a data set including all listed German, Italian, Belgian, and Finnish firms from 2007 to 2010.

Keywords: Audit fees; Audit pricing; Big 4 premium; Fee cutting; Matching (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.intaccaudtax.2017.10.002

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