Peer Firms in Audit Pricing: Evidence Under High Uncertainty Settings

Drawing on prior studies regarding the use of peers for investment decisions and compensation practices and the recent reports which suggest that firms use peer information for audit pricing, we examine the effect of peer groups on the audit pricing process under high information asymmetry environment. Using observations from the emerging markets of China, we find that peer group information is used in audit pricing with peer groups defined as the Industry, Industry/Region, Industry/Big4, Industry/Size, and Industry/Region/Big4. This is consistent with above complementary theories. We also find evidence that peer group information is more likely to be used by firms from low-technology industries, less developed regions, and firms audited by non-Big 4 CPA firms than those from high-technology industries, more developed regions, and firms audited by Big 4 CPA firms. Also, peer group information is more likely to be used in clients firms with shorter auditor tenure and with lower analyst following compared with their counterparts. Finally, we find that clients with lower audit fees than their peer groups in the previous period are more likely to increase audit fees in the current period. Our results are qualitatively the same regardless of whether we use an overall sample across different industries or for each industry separately. These results are consistent with the peer group literature and also indicate that peer group information is more likely to be used in conditions when information asymmetry is high.