Are Measures of an Audit Firm's Competitive Position in Local Markets Robust?

34 Pages Posted: 7 Jul 2020

See all articles by Marek Kacer

Marek Kacer

University of Leeds - Credit Management Research Centre (CMRC); Leeds University Business School (LUBS) - Accounting and Finance Division; University of Economics in Bratislava

Alan J. Duboisée de Ricquebourg

University of Leeds - Leeds University Business School (LUBS)

Michael J. Peel

Cardiff University - Cardiff Business School

Nick Wilson

University of Leeds - Credit Management Research Centre; Leeds University Business School

Date Written: June 11, 2020

Abstract

Recent studies determining the effect of audit market competition on firm level audit fees have developed novel measures of an audit firm’s relative competitive position. Numan and Willekens (2012) find a relationship between audit fees and the ‘industry market share distance to the closest competitor’. Chu et al. (2018) provide evidence that suggests smaller incumbent auditors are pressured into offering lower fees when competing against a large local audit firm. These results are important to regulators and antitrust authorities that seek to understand the implications of a market dominated by a few large audit firms. We demonstrate that competition measures employed in these audit pricing studies are endogenous by construction and that their relationship with audit fees is due to ‘mathematical coupling’. A series of simulations demonstrate that the coefficients of local competitive position measures are subject to simultaneity bias. We employ the instrumental variable (IV) regression method to account for simultaneity bias. Using ‘strong’ instruments, our IV regression results indicate that local competition measures are unrelated to audit fees after controlling for simultaneity bias. Our findings have import for audit pricing studies where explanatory variables are constructed which contain contemporaneous audit fee components.

Keywords: Audit pricing, Competition measures, Endogenous variables, Mathematical coupling

Suggested Citation

Kacer, Marek and Duboisée de Ricquebourg, Alan J. and Peel, Michael J. and Wilson, Nicholas, Are Measures of an Audit Firm's Competitive Position in Local Markets Robust? (June 11, 2020). Available at SSRN: https://ssrn.com/abstract=3625140 or http://dx.doi.org/10.2139/ssrn.3625140

Marek Kacer

University of Leeds - Credit Management Research Centre (CMRC) ( email )

Leeds, LS2 9JT
United Kingdom

Leeds University Business School (LUBS) - Accounting and Finance Division ( email )

Leeds LS2 9JT
United Kingdom

University of Economics in Bratislava ( email )

Dolnozemská cesta 1
Bratislava, 852 35
Slovakia

Alan J. Duboisée de Ricquebourg

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

Michael J. Peel

Cardiff University - Cardiff Business School ( email )

Cardiff
United Kingdom

Nicholas Wilson (Contact Author)

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Leeds University Business School ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

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