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

48 Pages Posted: 16 May 2017 Last revised: 25 Sep 2017

Stephanie F Cheng

University of Toronto, Rotman School of Management

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Danqi Hu

Northwestern University - Kellogg School of Management

Date Written: September 25, 2017

Abstract

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. The result suggests that audit fees decrease in response to the higher threat of entry. In cross-sectional analyses, we show that the reduction in fees is more pronounced when the merger is expected to induce a greater threat of new entrants ex ante, and is mitigated when such a 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

Cheng, Stephanie F and Hope, Ole-Kristian and Hu, Danqi, Strategic Entry Deterrence in the Audit Industry: Evidence from the Merger of Professional Accounting Bodies (September 25, 2017). Available at SSRN: https://ssrn.com/abstract=2968551 or http://dx.doi.org/10.2139/ssrn.2968551

Stephanie F Cheng

University of Toronto, Rotman School of Management ( email )

Toronto, ON
Canada

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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