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Audit Firms Face Downward-Sloping Demand Curves and the Audit Market Is Far from Perfectly Competitive

22 Pages Posted: 8 Jun 2017  

Joseph J. Gerakos

Tuck School of Business at Dartmouth College

Chad Syverson

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: June 5, 2017

Abstract

We explore how demand estimation can be applied in auditing research and review insights into the market that it has already provided. We set the foundation for the discussion by analyzing difficulties in the interpretation of the audit fee regression, a commonly applied tool in the auditing literature. We then discuss the mechanics of the discrete choice demand estimation approach used by Gerakos and Syverson (2015) and Guo, Koch, and Zhu (2017). We go on to explain how the findings from this work imply that audit firms have market power. That is, the market is not perfectly competitive, and indeed is far from it.

Keywords: auditing, competition, demand estimation

JEL Classification: M42

Suggested Citation

Gerakos, Joseph J. and Syverson, Chad, Audit Firms Face Downward-Sloping Demand Curves and the Audit Market Is Far from Perfectly Competitive (June 5, 2017). Available at SSRN: https://ssrn.com/abstract=2981965

Joseph Gerakos (Contact Author)

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Chad Syverson

University of Chicago Booth School of Business ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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