Local Audit Firm Pricing Responses to Entry of the Big Four Accounting Firms into China

34 Pages Posted: 28 Nov 2011 Last revised: 9 May 2012

See all articles by Tao Zeng

Tao Zeng

Wilfrid Laurier University - Lazaridis School of Business and Economics

Vikram Desai

University of Central Florida - Kenneth G. Dixon School of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: November 28, 2011

Abstract

The historical development and size of China’s audit market provides an opportunity to investigate important questions regarding the functioning of the market for audit services that are difficult, if not impossible, to test in other globally established markets. The purpose of this study is to examine the effect of the market entry of the Big Four accounting firms into China on audit fees charged by its local accounting firms. Audit market research has little to offer on local firm pricing responses to the entry of Big Four accounting firms in any market, mainly because in western countries such as Canada, England, and the United States, the Big Four accounting firms are the oldest firms operating in the market. In this paper we rely primarily on the incumbent pricing literature (Simon 2005; Geroski 1995) to assist us in developing our specific hypotheses and empirical tests. This paper examines whether local incumbent accounting firms cut prices in response to the Big Four entry. Using data from annual reports and audit reports for China’s listed companies from the years 1994 to 2008, this study shows that local incumbent firms cut prices post entry. This study also finds that, it were small- and medium-sized local audit firms that cut prices, and it were accounting firms located in regions with highly developed market and competition that cut prices, in response to entry.

Keywords: audit market, market entry, audit pricing, institutional environment, big four accounting firms

JEL Classification: M4

Suggested Citation

Zeng, Tao and Desai, Vikram, Local Audit Firm Pricing Responses to Entry of the Big Four Accounting Firms into China (November 28, 2011). CAAA Annual Conference 2012. Available at SSRN: https://ssrn.com/abstract=1965438 or http://dx.doi.org/10.2139/ssrn.1965438

Tao Zeng (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

250 University Avenue West
Waterloo, Ontario N2L 3C5
Canada
519-884-0710, ext. 256 (Phone)
519-884-0201 (Fax)

Vikram Desai

University of Central Florida - Kenneth G. Dixon School of Accounting ( email )

University of Central Florida
P.O. Box 161400
Orlando, FL 32816-1400
United States

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