Auditorss Response to Analystss Forecast Properties: Some Evidence from Audit Pricing

Abstract

This study draws on information asymmetry theory and audit pricing theory to examine the linkage between analysts’ earnings forecast properties and audit pricing in the US. To test these associations information asymmetry is measured by (1) analysts’ forecast accuracy, and (2) analysts’ forecast dispersion. This study provides evidence that higher analyst earnings forecast accuracy (dispersion) are associated with lower (higher) audit fee pricing. Our interpretation of these results are that analysts, as important financial intermediaries, provide useful information to other third parties, including auditors. We find that these relationships are stronger for small firms and younger firms in line with these firms having higher informational problems, and that audit firm industry specialization plays a significant role in reducing information asymmetry.