Strategic Entry Deterrence in the Audit Industry: Evidence from the Merger of Professional Accounting Bodies

47 Pages Posted: 16 May 2017 Last revised: 30 Oct 2018

Date Written: October 29, 2018

Abstract

We study how fees respond to the threat of entry (as distinct from actual entry) in the audit industry using a quasi-experimental setting. The recent staggered passage of mergers of three Canadian accounting certification bodies exogenously increases the probability of future entry to incumbent audit firms. We employ difference-in-differences tests with a strict fixed-effects structure (i.e., client-firm, audit-firm, province, and year-month fixed effects) and find that the approval of the merger on average leads to lower audit fees. In cross-sectional analyses, we explore the segmented nature of audit markets and show that the reduction in audit fees is concentrated in submarkets in which the change in entry threats is ex-ante credible (i.e., small auditees and non-Big4 auditors). Further analyses on these submarkets reveal that the reduction in audit fees is more pronounced when the merger is expected to induce a greater threat of new entrants and mitigated when auditors have greater bargaining power relative to auditees. The results provide empirical evidence on strategic entry deterrence in the audit industry.

Keywords: Entry Threats; Strategic Entry Deterrence, Industry Competition; Occupational Licensure; Merger Effects; Market Structure; Audit Industry; Audit Fees; Big-4 Auditors

JEL Classification: L10, L11, G30, G34, M40, M41, M42

Suggested Citation

Cheng, Stephanie and Hope, Ole-Kristian and Hu, Danqi, Strategic Entry Deterrence in the Audit Industry: Evidence from the Merger of Professional Accounting Bodies (October 29, 2018). Available at SSRN: https://ssrn.com/abstract=2968551 or http://dx.doi.org/10.2139/ssrn.2968551

Stephanie Cheng

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Danqi Hu

Northwestern University - Kellogg School of Management ( email )

2211 campus drive
EVANSTON, IL 60208
United States

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