2023- Working Papers: Finance, Accounting and Insurance

Companies listed in Israel on the Tel Aviv Stock Exchange must disclose total audit fees and hours of engagement. We identify a small sample of listed multinational companies that use auditors in different countries. We compile a dataset that includes both fees and hours in 25 different countries and compute the average hourly audit fee per country. We argue that hourly audit fee in a country should increase with country-specific audit risk, as auditors should be compensated for auditing riskier entities in a country. As a measure of audit risk, we use the Corruption Perception Index (CPI) published annually by Transparency International for each country. Hourly audit fee is an income measure; hence it is correlated with national income. We, therefore, compute a normalized average hourly audit fee as the average hourly rate divided by per-capita GDP in the country. Then, we examine the association between perceived corruption and normalized average hourly audit fee. We find a positive association between normalized hourly audit fees and corruption levels. We use alternative measures of corruption with similar results. Our results suggest that auditors in more corrupt countries are compensated for country-specific audit risk by charging a higher hourly audit rate for their services.

Despite its large body and fundamental importance, the research on asymmetric cost behavior has evolved empirically and lacks theoretical guidance. In light of this gap in the literature, we offer a novel theoretical framework for studying the phenomenon of cost asymmetry. Our theoretical analysis delves into the primitives of cost behavior, showing that cost behavior is asymmetric by default, even in the absence of the determinants identified by the literature. On this ground, we develop a capital market oriented theory that explains why cost asymmetry is likely to manifest in the pattern of cost stickiness. By incorporating capital market considerations in our analysis, we explore a signaling mechanism that serves managers to promote the stock price of their firm at the expense of distorting the optimal cost structure of the firm in a way that generates cost stickiness. We further show the effect of such costly capital market signaling on the firm’s ex-ante choice of production technology