The Impact of Stock Liquidity on Audit Pricing

Abstract

This paper investigates whether firms’ stock liquidity is associated with audit fees. Stock liquidity can increase institutional monitoring by either helping investors overcome free-rider problems to intervene in management decisions, or disciplining management through the threat of exit. Given that stock liquidity can enhance institutional monitoring, firms with higher stock liquidity may have incentives to utilize high quality audits which always result in higher audit fees to satisfy the demand of institutional investors. Consistent with these arguments, I find that firms with liquid stocks are more likely to pay significantly higher audit fees.