Does options trading affect audit pricing?

Abstract

AbstractWe examine the impact of options trading on audit pricing for a sample of US firms over the period from 2004 to 2021. We find that options trading is significantly and negatively related to audit fees, indicating that firms characterized by higher options trading incur lower audit fees. Auditors spend a lower number of days auditing firms with higher options trading and firms with higher options trading experience lower probabilities of lawsuits, and misstatements, and lower likelihood of material weaknesses and auditor opinion on internal controls. The impact of options trading on audit fees is stronger when the auditor is located further away from the audited firm, for firms with non‐specialized auditors, higher information asymmetry problems, poorer earnings and lower governance quality. Overall, our findings underscore the significance of options trading in improving a firm's information environment and reducing litigation risk, resulting in lower audit fees.