Relevant but Delayed Information in Negotiated Audit Fees: Evidence from Stock Price Crashes

Abstract

Audit fee negotiations conclude the first quarter of the year under audit, yet the audit fee is not disclosed until the first quarter of the following year. We conjecture that negotiated audit fees impound auditor’s consequential private, client-specific knowledge about events investors will eventually learn. We demonstrate that year-to-year changes in audit fees have an economically meaningful positive association with proxies for idiosyncratic risk — future negative stock performance (crashes, skewness, and volatility), debt downgrades and lawsuits. This relation holds in the year under audit as well as the following year. The results suggest that negotiated audit fees contain information meaningful to investors that if disclosed when known instead of in the following year, would reduce information asymmetry.