Non-audit services and the persistence and market pricing of earnings: Evidence from Korea

We examine the effects of the concurrent provision of audit and non-audit services on auditor independence using earnings persistence, which is one of the qualitative properties of earnings, as well as related market responses. Empirical results are as follows. First, the accruals persistence of the group that is concurrently provided audit and non-audit services in many cases is shown to be lower than that of the group that is not concurrently provided audit and non-audit services. Second, the phenomenon of low accruals persistence of the group that is concurrently provided a lot of audit and non-audit services is shown to be overestimated in the market. This study contributes to existing research in three main respects. First, from the viewpoint of earnings persistence, it is verified that rather than whether non-audit services are provided or not, the level of non-audit services acts as an important factor in determining damage to auditor independence by the concurrent provision of audit and non-audit services. Second, in relation to market rationality, whether the market appropriately reflects changes in the persistence of earnings and accruals according to whether non-audit services are provided or not is analyzed. Third, through additional analysis, it is verified that differences in the persistence of earnings and accruals among groups that are concurrently provided audit and non-audit services vary with the audit environment.