The economic theory of auditor independence (DeAngelo 1981b) suggests that auditors' incentives to compromise their independence are related to client importance. Using ratios of client fees and of nonaudit fees divided by the audit firm's U.S. revenues or a surrogate for the audit-practice-office revenues as measures of client importance, we investigate their association with Jones-model abnormal accruals. In a sample of 1,871 clients of Big 5 audit firms we do not find a statistically significant association between abnormal accruals and any of the client importance measures. Our theory development also suggests that auditor incentives to compromise independence should increase with the extent of client opportunities and incentives to manage earnings, and decrease with the strength of corporate governance and auditor expertise. We also do not find a statistically significant association between abnormal accruals and client importance in subsets of the samples partitioned by proxies for these factors.

This study investigates coefficient bias and heteroscedasticity resulting from scale differences in accounting levels-based research designs analytically and using simulations based on accounting data. Findings indicate that including a scale proxy as an independent variable is more effective than deflation at mitigating coefficient bias, even if the proxy is 95 percent correlated with the true scale factor. In fact, deflation can worsen coefficient bias. Also, deflation often does not noticeably reduce heteroscedasticity and can decrease estimation efficiency. White (1980) standard errors are close to the true ones in regressions using undeflated variables. Replications of specifications in three recent accounting studies confirm the simulation findings. The findings suggest that when scale differences are of concern, accounting researchers should include a scale proxy as an independent variable and report inferences based on White standard errors,

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Realized growth can be viewed as a proxy for the unobservable investment opportunity set (IOS) of the firm, and provides a benchmark against which IOS proxy variables can be compared. Results from such a comparison indicate that many of the variables from earlier studies, including book-to-market measures and capital expenditure to assets ratios are consistently correlated with subsequently realized growth. However, R&D intensity and E/P ratios do not exhibit any consistent association with subsequent growth indicating that they may not be valid IOS proxies. Copyright Blackwell Publishers Ltd 1999.