Spatial Competition at the Intersection of the Large and Small Audit Firm Markets

50 Pages Posted: 30 Apr 2013 Last revised: 5 May 2015

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Nathaniel M. Stephens

Utah State University - School of Accountancy

Date Written: March 25, 2015

Abstract

In this paper, we study spatial competition in the U.S. audit market while accounting for its two-tiered nature. We provide evidence on the differential impact that market share distances within and between the players in the large and small audit markets have on competition. We find that the market share distance from small audit firm competitors has a greater effect on the Big 4’s audit fees than distances from other Big 4 competitors. This finding suggests that small audit firms play a significant part in the competitive landscape in local markets. Further, we find that audit fees are increasing with the distance between a small audit firm and its closest competing small audit firm while audit fees are decreasing with the distance between a small audit firm and its closest competing large audit firm. This suggests that while obtaining separation in market space from competing small audit firms reduces competitive pressure from other small audit firms, as a small audit firm gets closer to the market space of a large audit firm it is perceived as being more like the larger audit firm and is able to obtain a fee premium like that attained by the larger audit firms.

Keywords: spatial competition; market for audit services; market space; differentiation; small audit market

JEL Classification: M4, M40, M41, M42, M49

Suggested Citation

Bills, Kenneth L. and Stephens, Nathaniel M., Spatial Competition at the Intersection of the Large and Small Audit Firm Markets (March 25, 2015). Auditing: A Journal of Practice & Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2257960 or http://dx.doi.org/10.2139/ssrn.2257960

Kenneth L. Bills (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Nathaniel M. Stephens

Utah State University - School of Accountancy ( email )

Logan, UT 84322-3540
United States
435-797-8016 (Phone)

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