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This paper proposes a model of audit fee determination based upon size and other characteristics of the auditee and the auditor, and upon whether there has been a recent change of auditor (which might lead to a low‐balling effect). A novel feature of the model is that auditee size is measured in two dimensions, sales and assets, and is allowed to have a quadratic relationship with audit fee. The model was estimated for a sample of large listed UK companies for the years 1981 to 1988. The results support the low‐balling hypothesis and also provide insights into the distinctive role of the Big 8 firms in the audit market.
Pong et al. (Thu,) studied this question.
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