Strategic Entry Deterrence in the Audit Industry: Evidence from the Merger of Professional Accounting Bodies
48 Pages Posted: 16 May 2017 Last revised: 24 Mar 2018
Date Written: March 21, 2018
We study how audit fees respond to the threat of entry (as distinct from actual entry) using a quasi-experimental setting, where the recent staggered passage of mergers of three Canadian accounting certification bodies exogenously increases the probability of future entry. We employ difference-in-differences tests with a strict fixed-effects structure (i.e., fixed effects for client firms, audit firms, provinces, and time) and find that the approval of the merger leads to lower audit fees. Further cross-sectional analyses show that the reduction in fees is more pronounced when the merger is expected to induce a greater threat of new entrants due to provincial-level institutional differences. In contrast, there is no reduction in fees for Big-4 audit firms and audit-industry leaders, suggesting that the downward pressure of the entry threat on prices is mitigated when the threat is ex-ante less credible (due to the existence of high entry barriers). The results provide empirical evidence on strategic entry deterrence in the audit industry.
Keywords: Audit Industry, Entry Threats, Strategic Entry Deterrence, Industry Competition, Audit Fees, Occupational Licensure, Merger Effects, Market Structure, Big-4
JEL Classification: L10, L11, G30, G34, M40, M41, M42
Suggested Citation: Suggested Citation