The Effects of Non-Big 4 Mergers on Audit Efficiency and Audit Market Competition

60 Pages Posted: 18 Jun 2019 Last revised: 20 Jul 2023

See all articles by Andrew Kitto

Andrew Kitto

University of Massachusetts Amherst; affiliation not provided to SSRN

Date Written: June 16, 2023

Abstract

This study examines whether recent mergers between small and midsize accounting firms influence competition by increasing the number of firms that can compete with larger rivals in the U.S. public company audit market. I find that in-market mergers generate efficiencies that are reflected in a post-merger reduction in audit hours but not in reduced audit quality. For both in-market and out-of-market mergers, clients switching to post-merger firms are more likely to be accelerated filers and are significantly larger in terms of several proxies for size and complexity. Lastly, I find that an increase in market-level merger activity is associated with lower profitability of Big 4 firms operating in the same market but only in the smaller client segment. These findings suggest that recent mergers have actually increased competition in some segments of the audit market despite already high concentration and concerns about a lack of sufficient competition.

Keywords: auditing, audit fees, competition, efficiency, mergers, PCAOB

JEL Classification: M41, M42, D40, G35

Suggested Citation

Kitto, Andrew, The Effects of Non-Big 4 Mergers on Audit Efficiency and Audit Market Competition (June 16, 2023). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3401509 or http://dx.doi.org/10.2139/ssrn.3401509

Andrew Kitto (Contact Author)

University of Massachusetts Amherst ( email )

Amherst, MA 01003-4910
United States

affiliation not provided to SSRN

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