The Impact of Market Structure on Audit Price and Quality
49 Pages Posted: 30 Apr 2013
Date Written: April 29, 2013
We examine the association between U.S. audit market structure and both audit price and quality. The significant consolidation of the largest audit firms and its effect on market structure has raised international concern among policy makers. We address this concern by examining the association between equality of Big4 market shares at the U.S. national-industry level and both audit fees and audit quality. Our results suggest that greater national-industry Big4 market equality is associated with lower audit fees and higher audit quality measured by client restatements. We extend the analysis to the city level and find equality associated with higher fees but little association with quality. We incorporate market concentration as another measure of market structure and find equality better captures the association between market structure and audit fees. National-industry equality also continues to be positively associated with quality despite a significant association between city level concentration and quality. Our results suggest that the equality of audit firm market shares is associated with important market outcomes even in the highly concentrated audit market, and that alternative levels of market aggregation such as the national-industry and city levels provide different insights into the effects of market structure.
Keywords: Market Structure, Audit Fees, Audit Quality, Auditor Market Share Equality
JEL Classification: M4, L11
Suggested Citation: Suggested Citation