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Transaction costs and competition among audit firms in local markets

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  • Chu, Ling
  • Simunic, Dan A.
  • Ye, Minlei
  • Zhang, Ping

Abstract

We develop a measure to capture an audit firm's competitive position in a local audit market based on the transaction costs of changing audit firms included in DeAngelo's (1981) multi-period audit pricing model. Our competition measure reflects the size difference between the largest audit firm in a market specified by client industry at the city level and the other audit firms operating in that market. We find that audit fees of a client decrease as this size difference increases. This result suggests that smaller audit firms charge lower audit fees because of their competitive disadvantage to the local largest firm.

Suggested Citation

  • Chu, Ling & Simunic, Dan A. & Ye, Minlei & Zhang, Ping, 2018. "Transaction costs and competition among audit firms in local markets," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 129-147.
    • Handle: RePEc:eee:jaecon:v:65:y:2018:i:1:p:129-147
    DOI: 10.1016/j.jacceco.2017.11.004
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