Urban agglomeration and audit pricing

Abstract

An underlying assumption in audit pricing literature is that the audit market is national in nature. However, urban economics literature clearly demonstrates an 'urban premium' due to urban externalities such as knowledge spillovers and the higher ability of workers in metropolitan areas. In this paper, I empirically investigate the link between the spatial clustering of firms in large, central cities (i.e., urban agglomeration) and audit pricing. I employ data sets of US listed firms located in urban and rural areas and demonstrate an overall significant urban audit fee premium. I provide novel evidence suggesting that, for shareholders, urban agglomeration entails additional costs relating to monitoring corporate agents and reliance on consulting services. Additionally, I demonstrate that urban auditors do not maintain fee premiums when auditing rural firms. Finally, I show that audit fees are higher due to audit complexities rather than litigation risk.