Self‐Selection of Auditors and Audit Pricing in Private Firms

Prior research has examined audit pricing for publicly held firms and provided some evidence of a Big 8 premium in pricing. We investigate audit pricing among private firms, and provide evidence that private firms do not pay such a premium on average. The relatively greater degree of dispersion in auditor choice (between Big 5 and non‐Big 5 auditors) in our large sample of privately held audit clients allows us to predict the auditor choice for each firm and to control for potential self‐selection. We reject the null hypothesis that clients are randomly allocated across Big 5 and non‐Big 5 auditors. Using standard OLS regressions, we document a Big 5 premium; however this premium vanishes once we control for self‐selection bias. Moreover, we find that client firms choosing Big 5 auditors generally would have faced higher fees had they chosen non‐Big 5 auditors, given their firm‐specific characteristics. Our results are consistent with audit markets for private firms being segmented along cost‐effective lines. Further, our results suggest that auditees in our setting do not, on average, view Big 5 auditors as superior in terms of the perceived quality of the services provided to a degree significant enough to warrant a fee premium.