Regulatory Spillovers in Common Audit Markets

65 Pages Posted: 19 Aug 2017 Last revised: 16 Nov 2018

See all articles by Raphael Duguay

Raphael Duguay

University of Chicago, Booth School of Business, Students

Michael Minnis

University of Chicago - Booth School of Business

Andrew Sutherland

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: November 15, 2018

Abstract

We find that Sarbanes-Oxley (SOX) had two significant effects on the audit market for nonpublic entities. The first short-run effect stems from inelastic labor supply coupled with an audit demand shock from public companies. As a result, private companies reduced their use of attested financial reports in bank financing by 12%, and audit fee increases for nonprofit organizations (NPOs) more than doubled. The second long-run effect was a transformation in the audit supply structure. After SOX, NPOs were less likely to match with auditors most exposed to public companies, while auditors increasingly specialized their offices based on client type. Audit market concentration for NPOs dropped by more than half within five years of SOX and remained at this level through the end of our sample in 2013, while the number of suppliers increased by 26%. Our results demonstrate how regulation directed at public firms causes eco-nomically important spillovers for nonpublic entities.

Keywords: Sarbanes-Oxley, securities regulation, auditing, market structure, accounting, private firms, non-profits, labor economics

JEL Classification: H83, M12, M21, M41, M48, M49

Suggested Citation

Duguay, Raphael and Minnis, Michael and Sutherland, Andrew, Regulatory Spillovers in Common Audit Markets (November 15, 2018). Chicago Booth Research Paper No. 17-24; MIT Sloan Research Paper No. 5234-17. Available at SSRN: https://ssrn.com/abstract=3020316 or http://dx.doi.org/10.2139/ssrn.3020316

Raphael Duguay

University of Chicago, Booth School of Business, Students ( email )

Chicago, IL
United States

Michael Minnis (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Andrew Sutherland

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street

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