When Press Talks, Do Auditors Listen? Implications of Negative Media Sentiment for Audit Pricing

• In Event: Audit Pricing

Abstract

We investigate the role of the business press in the auditor’s assessment of a client’s business risk. We argue that negative press coverage affects audit effort as well as audit pricing by increasing auditors’ litigation and reputation risk, by signaling clients’ lower future profitability, and by affecting investors’ perception about the auditor. We use a novel dataset that analyzes the contents of, and provides sentiment scores for, every news item in real-time. Results from a level regression as well as a unique difference-in-differences test indicate that audit fee increases with negative media sentiment. Additional analyses reveal that, as a consequence of negative media sentiment, audit quality increases; and the widely documented lowballing disappears. Our results are robust to alternative definitions of sentiment score and alternative specifications of audit fee models. Overall, we provide new insights into the role of the business press as an information intermediary.

Authors

• Md Safayat Hossain, Florida International University

• Hasibul Chowdhury, The University of Queensland

• Kartick Gupta, The University of South Australia