On the Benefits of Audit Market Consolidation: Evidence from Merged Audit Firms
Posted: 1 Aug 2015 Last revised: 19 Jan 2019
Date Written: July 21, 2014
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
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