Strategic Entry Deterrence in the Audit Industry: Evidence from the Merger of Professional Accounting Bodies
46 Pages Posted: 16 May 2017 Last revised: 31 Jan 2019
Date Written: January 30, 2019
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: Suggested Citation