Diverse effects of different types of media coverage on audit fees: Evidence based on media tones

This paper investigates the relationship between different types of media coverage and audit fees. We theoretically and empirically distinguish between the media's information and monitoring role resulting from impartial, neutral coverage, which is associated with lower audit risk, and the media's attention-grabbing role resulting from sensational or biased reporting, which is associated with higher auditor business risk. Using data from US public firms between 2003 and 2021, we find that client firms with large amounts of neutral media coverage pay lower audit fees, consistent with the neutral coverage hypothesis, whereas those with large amounts of (especially negatively) toned media coverage pay higher audit fees, consistent with the attention-grabbing hypothesis. We find media's attention-grabbing effect to be stronger for client firms of large auditors and firms with more analysts following and high institutional ownership. Our channel analyses suggest that auditors adjust risk assessments and expected audit effort in response to media coverage. Overall, the findings indicate diverse effects of different types of media coverage on audit fees and highlight the complex interplays among auditors, media, and major market participants.