Leverage and Audit Firm Mergers
28 Pages Posted: 20 Apr 1999
Date Written: February 16, 1998
We study what a simulated market of pure price competition reveals about market shares and per-partner profits in Big Six audit firm mergers for 1997. In the model of audit production we use, leverage (staff-to-partner ratio) reflects the productivity of an audit partner and is key to analyzing productivity changes that arise from merger. We model price competition among 270 firms and find that post-merger leverage improvement leads to increases both in market share and in per-partner profits. The rank of a merger on market-share increase is sensitive to alternative estimates of leverage, but the rank on per-partner profit increase is not. A merger involving Arthur Andersen generally ranks highest. Absent Arthur Andersen, we find that the 1998 merger between Price Waterhouse and Coopers & Lybrand produces higher per-partner profit increases than the failed merger between Ernst & Young and KPMG Peat Marwick.
JEL Classification: D24, L84, M49
Suggested Citation: Suggested Citation