Earnings quality, Non-audit Services, and Investors' Perceptions: Empirical Evidence from Germany

The potential harmful effect on the accounting numbers of the provision of audit and non-audit services (NAS) to audit clients is perhaps the most debated auditing issues among policy makers, regulators, and the profession (European Commission 2010, 2011) . The purpose of our study is to investigate whether auditor-provided NAS affect investors? perception of audit quality in the Germany. To investigate investors? perception of NAS we will examine the relation between stock prices or returns and the prov ision of NAS. When the value relevance of earnings (e.g., in terms of the earnings response coefficients; ERC) is negatively associated with the provision of NAS, this indicates that investors view NAS as inducing the provision of less relevant and reliab le earnings information. It also suggests that independence concerns dominate the benefits of knowledge spillover. The limited prior research on investors' perceptions of NAS typically uses U.S. data. Investors? perceptions of NAS may be influenced by r egulations and oversight. The regulatory environment differs between Germany and the U.S. Thus, is interesting to investigate investors' perception of NAS in a German context. Fee disclosure is mandatory in Germany since fiscal year 2005 and companies are required to disclose audit fees and three categories of NAS fees. This will enable to examine perceptions across service category, extending prior research. We will use an earnings-return relation methodology with the ERC and several non-audit fee mea sures as our primary test variables. Our sample will consist of German listed firms that are a member of the CDAX index. Our German-based study will add to the existing body of knowledge by reporting new evidence of how the regulatory environment affect s investors' perceptions of NAS. Such evidence will also be of value for German and European regulators decisions to protect audit quality in the capital market.