On the Benefits of Audit Market Consolidation: Evidence from Merged Audit Firms
Authors:
- 1 July 2015
- journal article
- Published by American Accounting Association in The Accounting Review
- Vol. 91 (2) , 463-488
Abstract
We examine efficiency improvement associated with audit firm mergers. Our analysis is made possible by a unique dataset of audit hours in China. We find a significant reduction in audit hours, unaccompanied by a deterioration in audit quality, of merged audit firms. Further, we find a larger reduction in audit hours when acquirers are Chinese domestic Big 10 audit firms and when client firms are more complex. These results are consistent with the notion of economies of scale arising from horizontal mergers. However, enhanced efficiency does not necessarily reduce audit fees. Instead, we find an increase in audit fees when acquirers are international Big 4 audit firms even when we control for possible changes in market power. This premium is at least partially due to the certification effect of international Big 4 audit firms.Keywords
This publication has 40 references indexed in Scilit:
- Post-merger restructuring and the boundaries of the firmJournal of Financial Economics, 2011
- Endogeneity in Empirical Corporate FinanceSSRN Electronic Journal, 2011
- Aggregate Quasi Rents and Auditor Independence: Evidence from Audit Firm Mergers in China*Contemporary Accounting Research, 2010
- Lending Relationships and Loan Contract TermsThe Review of Financial Studies, 2009
- On Loan Sales, Loan Contracting, and Lending RelationshipsThe Review of Financial Studies, 2008
- The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?The Journal of Finance, 2001
- Economies of Scale: A Survey of the Empirical LiteratureSSRN Electronic Journal, 1997
- Collusion in AuditingJournal of Accounting Research, 1991
- The Role of Market Forces in Assuring Contractual PerformanceJournal of Political Economy, 1981
- Sample Selection Bias as a Specification ErrorEconometrica, 1979