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    Asymmetric Reactions of Abnormal Audit Fee Jump to Credit Rating Changes

    91066.pdf (836.8Kb)
    Access Status
    Open access
    Authors
    Cao, June
    Hasan, I.
    Ee, M.S.
    Huang, H.
    Date
    2023
    Type
    Journal Article
    
    Metadata
    Show full item record
    Citation
    Cao, J. and Hasan, I. and Ee, M.S. and Huang, H. 2023. Asymmetric Reactions of Abnormal Audit Fee Jump to Credit Rating Changes. British Accounting Review. 101205.
    Source Title
    British Accounting Review
    DOI
    10.1016/j.bar.2023.101205
    ISSN
    0890-8389
    Faculty
    Faculty of Business and Law
    School
    School of Accounting, Economics and Finance
    URI
    http://hdl.handle.net/20.500.11937/91242
    Collection
    • Curtin Research Publications
    Abstract

    Abstract Considering the inherent stickiness of abnormal audit fees, our study contributes to the literature by decomposing abnormal audit fees into a jump component and long-run sticky component. We investigate whether and how changes in credit ratings asymmetrically affect the jump component of abnormal audit fees. We document a positive association between rating downgrades and the jump component. We find that heightened bankruptcy risk and misstatement risk are the mechanisms that drive this relationship. Further analysis shows that firms experiencing rating downgrades are more likely to receive a going concern opinion and experience longer audit report lags. Taken together, our findings provide direct evidence that credit ratings are significantly associated with abnormal audit fees, particularly with the jump component. Given the serial correlation of abnormal audit fees, our study sheds light on the importance of disaggregation of the abnormal audit fee residuals into the jump and long-run sticky components.

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