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

46 Pages Posted: 16 May 2017 Last revised: 13 Jul 2021

See all articles by Stephanie F. Cheng

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Danqi Hu

Northwestern University - Kellogg School of Management

Date Written: July 12, 2021

Abstract

Studies show that incumbents reduce prices in response to higher entry threats in consumer industries. We provide new insights on the importance of an incumbent firm’s reputation to the limit-pricing decision by examining a professional service industry where the supplier’s reputation serves as an existing barrier. The recent staggered passage of mergers of three Canadian accounting certification bodies exogenously increases the probability of future entry to incumbent audit firms. Employing difference-in-differences analyses and a strict fixed effects structure (client-firm, audit-firm, province, and year-month fixed effects), we find that incumbent audit firms reduce audit fees in response to a higher entry threat induced by the merger. The microstructure of the audit industry provides further insights—Non-Big4 audit firms reduce fees after the merger, while Big-4 audit firms can withstand higher entry threats and do not adjust fees.

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 F. and Hope, Ole-Kristian and Hu, Danqi, Strategic Entry Deterrence in the Audit Industry: Evidence from the Merger of Professional Accounting Bodies (July 12, 2021). Available at SSRN: https://ssrn.com/abstract=2968551 or http://dx.doi.org/10.2139/ssrn.2968551

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
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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