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

47 Pages Posted: 16 May 2017 Last revised: 13 Dec 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: December 12, 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. 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

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 (December 12, 2017). Available at SSRN: https://ssrn.com/abstract=2968551 or http://dx.doi.org/10.2139/ssrn.2968551

Stephanie 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

2211 campus drive
EVANSTON, IL 60208
United States

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