Leverage and Audit Firm Mergers

28 Pages Posted: 20 Apr 1999

See all articles by Rajib Doogar

Rajib Doogar

University of Washington, Bothell

Robert F. Easley

University of Notre Dame

David N. Ricchiute

University of Notre Dame - Department of Accountancy

Date Written: February 16, 1998

Abstract

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

Doogar, Rajib and Easley, Robert F. and Ricchiute, David N., Leverage and Audit Firm Mergers (February 16, 1998). Available at SSRN: https://ssrn.com/abstract=152248 or http://dx.doi.org/10.2139/ssrn.152248

Rajib Doogar (Contact Author)

University of Washington, Bothell ( email )

18807 Beardslee Boulevard
Box 358584
Bothell, WA 98011-1712
United States
(425) 352-3332 (Phone)

Robert F. Easley

University of Notre Dame ( email )

College of Business Administration Department of Management
Notre Dame, IN 46556-0399
United States
219-631-6077 (Phone)
219-631-5255 (Fax)

David N. Ricchiute

University of Notre Dame - Department of Accountancy ( email )

Department of Accountancy
Notre Dame, IN 46556-0399
United States
219-631-5276 (Phone)
219-631-5255 (Fax)

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