Market Power and Competition in Audit Markets

Date
2019-08-23
Authors
Zhang, Ping
Ye, Minlei
Simunic, Dan
Chu, Ling
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Abstract
This study investigates the impact of audit firms’ market power on audit fees in MSA-Industry audit markets. We propose that the state of competition in each MSA-Industry market reflects two components. The first component is the audit firms’ collective market power over their clients, and the second is the audit firms’ relative competitive positions with respect to each other. We argue that the measured concentration of the market is positively associated with the audit firms’ collective market power over their clients, and tends to increase audit fees for all engagements. In addition, the fees charged by a specific audit firm are a function of its relative competition position in the market. We document that audit fees increase in market concentration and decrease in the audit firm’s relative size as compared to the largest audit firm in the market. Given the fact that an inconsistent relationship between audit fees and market concentration is often documented in the extant literature, this paper advances our understanding of the impact of audit market concentration on competition in audit markets from both theoretical and empirical perspectives.
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market concentration, competitive disadvantage, audit fees
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