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Using a large sample of observations between 2001 and 2011, this paper provides a comprehensive investigation about the relationship between credit ratings and audit fees. Companies with lower credit ratings are associated with higher audit fees. Credit downgrades are associated with audit fee increases, while credit upgrades are associated with audit fee decreases. Firms that experienced credit rating change from investment grade to speculative grade are associated with even higher audit fees, indicating that the relationship between rating changes and audit fees is non-linear. Further, auditors place more weight on credit ratings after the Sarbanes-Oxley Act while placing less weight on credit ratings after the financial crisis, which is likely due to the criticism to credit rating agencies for their role in the financial crisis.
Hsihui Chang, Drexel University
Yanwei Chen, Shanghai Stock Exchange
Jian Zhou, University of Hawaii at Manoa