Abnormal Audit Fees and Properties of Analyst Forecasts, the Role of Cross-Listing and Legal Origin

Abstract

This paper examines the influence of audit quality on the quality of earnings measured by the accuracy of analysts’ earnings forecasts. A high perceived audit quality enhances the confidence in the integrity of financial reporting and signals greater precision of earnings’ information, thus our hypothesis is that firms with high quality audits will have more persistent and predictable earnings and then more accurate earnings forecasts. The paper benefits from two specificities of the Canadian context: the exposure to a more litigious legal environment for Canadian firms which are cross-listed in the U.S., and an exposure to a Civil French Law environment for Canadian firms incorporated in the province of Quebec (versus common law for the rest of Canadian provinces). We add additional hypotheses derived from the specificities of our Canadian sample to analyze the effect of those legal environment indicators on our main research question.We use abnormal audit fees to measure audit quality and we control for the influence of cross-listing and the legal regime, on a sample of 798 listed Canadian firms for the year 2007. Audit data were hand collected. Our preliminary findings confirm the asymmetric distribution of abnormal audit fees and document a negative association between positive abnormal audit fees analyst forecast accuracy, whereas there is no association with negative abnormal audit fees. We also document the effects of cross-listing and legal environment on the association between audit quality and analyst forecast accuracy.