Overvalued equities and audit fees: a research note

Abstract

Purpose – The purpose of this research note is to examine the association between overvalued equities and audit fees in the USA.Design/methodology/approach – The paper employs a standard audit fee regression model incorporating proxies for overvalued equities and controls for other known determinants of audit fees. Three proxies for overvaluation are used in this paper. These are: a lagged price‐earnings‐based overvaluation measure; a lagged price‐to‐book‐based overvaluation measure; and finally, a lagged abnormal‐return‐based overvaluation proxy measure.Findings – Findings show that auditors charge higher audit fees for clients posing increased audit risks because of equity overvaluation, that this relationship did not change during and after the global financial crisis period, and is more pronounced for firms prone to aggressive earnings management.Practical implications – This finding should assure investors about audit quality, since the positive finding potentially implies that auditors exert extra a...