On the Benefits of Audit Market Consolidation: Evidence from Merged Audit Firms

Posted: 1 Aug 2015 Last revised: 19 Jan 2019

See all articles by Qihui Gong

Qihui Gong

Wuhan University

Oliver Zhen Li

National University of Singapore (NUS)

Yupeng Lin

National University of Singapore

Liansheng Wu

Peking University - Guanghua School of Management

Date Written: July 21, 2014

Abstract

We examine efficiency improvement associated with audit firm mergers. Our analysis is made possible by a unique dataset of audit hours in China. We find a significant reduction in audit hours, unaccompanied by a deterioration in audit quality, of merged audit firms. Further, we find a larger reduction in audit hours when acquirers are Chinese domestic Big10 audit firms and when client firms are more complex. These results are consistent with the notion of economies of scale arising from horizontal mergers. However, enhanced efficiency does not necessarily reduce audit fees. Instead, we find an increase in audit fees when acquirers are international Big4 audit firms even when we control for possible changes in market power. This premium is at least partially due to the certification effect of international Big4 audit firms.

Keywords: audit mergers, efficiency gains, audit fees, audit hours

JEL Classification: M42, G34

Suggested Citation

Gong, Qihui and Li, Oliver Zhen and Lin, Yupeng and Wu, Liansheng, On the Benefits of Audit Market Consolidation: Evidence from Merged Audit Firms (July 21, 2014). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2638171

Qihui Gong

Wuhan University ( email )

Wuhan
China

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Yupeng Lin (Contact Author)

National University of Singapore ( email )

15 Kent ridge drive
Singapore
Singapore

HOME PAGE: http://sites.google.com/site/scottlinyupeng/

Liansheng Wu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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