Audit Pricing of Corporate Spinoffs

Related literature documents that corporate spinoffs decrease parent firms’ industrial scope so the firms can better focus on core businesses. However, prior studies show that not every spinoff is efficiency-increasing and hence value-adding. This study extends the understanding on the implication of spinoffs by examining whether auditors understand the differential risk implications of corporate spinoffs. Specifically, we investigate whether auditors reflect their assessment on corporate spinoffs in audit pricing. Based on 114 corporate spinoffs in Korea for the period from 2002 to 2017, we first document that audit fees decrease significantly for ongoing parent companies after spinoffs, which appears to reflect reduced audit scope due to clients’ scale reduction. An exclusive focus on consolidated spinoffs in which the audit scope remains unaffected provides more interesting evidence. We reveal that the fee decrease after spinoffs is more salient for parent clients with greater risk reduction, proxied by 1) more positive market reaction and 2) higher performance growth. Our findings indicate that both the scale effect and the risk effect play distinctive roles in audit pricing during spinoffs.