The Public Accounting Industry Production Function
Posted: 12 Feb 2003
A translog function is specified to represent the relation between revenue and human resource inputs in public accounting firms. Estimation of the model using a balanced panel of annual data for 64 large CPA firms for the period 1995-1999 indicates that increasing returns to scale prevail in the public accounting industry, justifying recent merger and acquisition activities among accounting firms. Average marginal revenue product of partners increased monotonically from 1995 to 1998, decreased slightly in 1999, and was about nine times that of other professionals during 1995-1999. The public accounting industry exhibited continuing improvement in productivity over the five years.
Keywords: public accounting, scale economies, marginal revenue products, Big Five firms, CPA partner compensation, production function
JEL Classification: M49, D24, L11
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