A Multiperiod Model and Experimental Evidence of Independence and “Lowballing”

Jeffrey W Schatzberg, GALEN R. SEVCIK

Research output: Contribution to journalArticle

29 Citations (Scopus)

Abstract

Abstract. Auditors, regulators, and academics are interested in the pricing practice of “lowballing” and its relationship to auditor independence. Several analytical models have examined these issues. However, these theories have gone untested primarily due to a lack of field data concerning important environmental variables. In this study, a multiperiod model of lowballing and independence is developed and tested in laboratory markets via the experimental economics methodology. The study contributes to the literature in two respects. First, it represents one of the first studies providing empirical evidence and theory testing of the relationship between lowballing and independence. Second, the model presents a new rationale for low‐ball pricing and its relationship to auditor independence. Lowballing and impairment of independence, occurring without exogenous transaction costs, are caused by positing cross‐sectional variation in audit cost and quality and an informational advantage that accrues to an incumbent auditor‐client pair regarding future variation in these audit dimensions. The model is operationalized in a multiperiod laboratory market consisting of multiple sellers and buyers. Sixteen markets are conducted to test price and reporting predictions of the model. The markets strongly exhibit lowballing behavior, but the exact price predictions are generally not supported. The markets also support reporting predictions, with sellers deviating from truthful reporting (impairing their independence) only when additional future profits are greater than the additional cost of misreporting. Data availability. The laboratory market data used in this paper are available from the authors upon request. 1994 Canadian Academic Accounting Association

Original languageEnglish (US)
Pages (from-to)137-174
Number of pages38
JournalContemporary Accounting Research
Volume11
Issue number1
DOIs
StatePublished - 1994

Fingerprint

Prediction
Audit
Costs
Pricing
Auditor independence
Seller
Analytical model
Theory testing
Economic methodology
Auditors
Misreporting
Transaction costs
Market data
Experimental economics
Rationale
Buyers
Impairment
Incumbents
Empirical evidence
Profit

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

A Multiperiod Model and Experimental Evidence of Independence and “Lowballing”. / Schatzberg, Jeffrey W; SEVCIK, GALEN R.

In: Contemporary Accounting Research, Vol. 11, No. 1, 1994, p. 137-174.

Research output: Contribution to journalArticle

@article{2c286fbf92424a759bf3360c0348266e,
title = "A Multiperiod Model and Experimental Evidence of Independence and “Lowballing”",
abstract = "Abstract. Auditors, regulators, and academics are interested in the pricing practice of “lowballing” and its relationship to auditor independence. Several analytical models have examined these issues. However, these theories have gone untested primarily due to a lack of field data concerning important environmental variables. In this study, a multiperiod model of lowballing and independence is developed and tested in laboratory markets via the experimental economics methodology. The study contributes to the literature in two respects. First, it represents one of the first studies providing empirical evidence and theory testing of the relationship between lowballing and independence. Second, the model presents a new rationale for low‐ball pricing and its relationship to auditor independence. Lowballing and impairment of independence, occurring without exogenous transaction costs, are caused by positing cross‐sectional variation in audit cost and quality and an informational advantage that accrues to an incumbent auditor‐client pair regarding future variation in these audit dimensions. The model is operationalized in a multiperiod laboratory market consisting of multiple sellers and buyers. Sixteen markets are conducted to test price and reporting predictions of the model. The markets strongly exhibit lowballing behavior, but the exact price predictions are generally not supported. The markets also support reporting predictions, with sellers deviating from truthful reporting (impairing their independence) only when additional future profits are greater than the additional cost of misreporting. Data availability. The laboratory market data used in this paper are available from the authors upon request. 1994 Canadian Academic Accounting Association",
author = "Schatzberg, {Jeffrey W} and SEVCIK, {GALEN R.}",
year = "1994",
doi = "10.1111/j.1911-3846.1994.tb00440.x",
language = "English (US)",
volume = "11",
pages = "137--174",
journal = "Contemporary Accounting Research",
issn = "0823-9150",
publisher = "Wiley-Blackwell",
number = "1",

}

TY - JOUR

T1 - A Multiperiod Model and Experimental Evidence of Independence and “Lowballing”

AU - Schatzberg, Jeffrey W

AU - SEVCIK, GALEN R.

PY - 1994

Y1 - 1994

N2 - Abstract. Auditors, regulators, and academics are interested in the pricing practice of “lowballing” and its relationship to auditor independence. Several analytical models have examined these issues. However, these theories have gone untested primarily due to a lack of field data concerning important environmental variables. In this study, a multiperiod model of lowballing and independence is developed and tested in laboratory markets via the experimental economics methodology. The study contributes to the literature in two respects. First, it represents one of the first studies providing empirical evidence and theory testing of the relationship between lowballing and independence. Second, the model presents a new rationale for low‐ball pricing and its relationship to auditor independence. Lowballing and impairment of independence, occurring without exogenous transaction costs, are caused by positing cross‐sectional variation in audit cost and quality and an informational advantage that accrues to an incumbent auditor‐client pair regarding future variation in these audit dimensions. The model is operationalized in a multiperiod laboratory market consisting of multiple sellers and buyers. Sixteen markets are conducted to test price and reporting predictions of the model. The markets strongly exhibit lowballing behavior, but the exact price predictions are generally not supported. The markets also support reporting predictions, with sellers deviating from truthful reporting (impairing their independence) only when additional future profits are greater than the additional cost of misreporting. Data availability. The laboratory market data used in this paper are available from the authors upon request. 1994 Canadian Academic Accounting Association

AB - Abstract. Auditors, regulators, and academics are interested in the pricing practice of “lowballing” and its relationship to auditor independence. Several analytical models have examined these issues. However, these theories have gone untested primarily due to a lack of field data concerning important environmental variables. In this study, a multiperiod model of lowballing and independence is developed and tested in laboratory markets via the experimental economics methodology. The study contributes to the literature in two respects. First, it represents one of the first studies providing empirical evidence and theory testing of the relationship between lowballing and independence. Second, the model presents a new rationale for low‐ball pricing and its relationship to auditor independence. Lowballing and impairment of independence, occurring without exogenous transaction costs, are caused by positing cross‐sectional variation in audit cost and quality and an informational advantage that accrues to an incumbent auditor‐client pair regarding future variation in these audit dimensions. The model is operationalized in a multiperiod laboratory market consisting of multiple sellers and buyers. Sixteen markets are conducted to test price and reporting predictions of the model. The markets strongly exhibit lowballing behavior, but the exact price predictions are generally not supported. The markets also support reporting predictions, with sellers deviating from truthful reporting (impairing their independence) only when additional future profits are greater than the additional cost of misreporting. Data availability. The laboratory market data used in this paper are available from the authors upon request. 1994 Canadian Academic Accounting Association

UR - http://www.scopus.com/inward/record.url?scp=84984235508&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84984235508&partnerID=8YFLogxK

U2 - 10.1111/j.1911-3846.1994.tb00440.x

DO - 10.1111/j.1911-3846.1994.tb00440.x

M3 - Article

VL - 11

SP - 137

EP - 174

JO - Contemporary Accounting Research

JF - Contemporary Accounting Research

SN - 0823-9150

IS - 1

ER -