Peer Group and Audit Fees in Chinese Firms

Drawing on herding behavior theory, prior studies regarding the use of peers for investment decisions and compensation practices and the recent reports which suggest that firms use peer information for audit pricing, we examine the effect of peer groups on the audit pricing process of a sample of Chinese firms. Using observations for the years 2002-2012, and matching groups based on the Industry, Industry/Region, Industry/Big4 and Industry/Size to define peer group, we find that peer group information is used in audit pricing. We also find evidence that peer group information are more likely to be used in firms in low technology industry, less developed regions, and firms audited by non-Big 4 CPA firms compared to those in high technology industry, more developed regions, and firms audited by Big 4 CPA firms. Finally, we find that clients with lower audit fees than their peer groups in the previous period are more likely to increase audit fees in the current period. These are consistent with the herding theory that peer group information is most likely used in conditions when information asymmetry risk is high.