The Effects of Disclosure Tone on Audit Pricing

Abstract: This study examines the consequences of disclosure tone on audit pricing. Specifically, I analyze the relationship between the optimistic tone scores of the management discussion and analysis (MD&A) component of the annual reports of firms, and the fees charged by their external auditors. I find a strong inverse relationship between audit fees and the tone proxies of the MD&A section. The results are consistent with the finding of prior research that companies use the disclosure tone to reduce information asymmetry between firm insiders and public investors rather than using the tone opportunistically to draw a rosier picture. This paper contributes to the current audit fee determinants literature by showing how the qualitative characteristics of disclosure affect the pricing decisions of auditors.

Many thanks to Zenghui’s Proposal Defense Committee: Committee Chair: Hsihui Chang, Ph.D. KPMG Professor of Accounting Committee Member: Anthony Curatola, Ph.D. Joseph F. Ford Professor of Accounting Committee Member: Hiu Lam Choy, Ph.D. Associate Professor of Accounting Committee Member: Thomas Chiang, Ph.D. Marshall M. Austin Professor of Finance Committee Member: Johnny Lee, Ph.D. Associate Clinical Professor of Accounting