Agency costs and product market competition: The case of audit pricing in Greece

Jensen and Meckling (1976) argue that agency costs are not dependent on product market competition. However, elsewhere in the economics literature, theoretical analysis and empirical research have indicated that product market competition reduces agency costs by reducing the marginal cost of eliciting effort from agents. We investigate the relationship between product market competition and audit fee, as an example of agency cost. Taking advantage of a proprietary data set for Greek audit firms, we find that the audit fee and audit hours are inversely associated with client firm product market competition. We conclude that audit effort, as an agency cost, is reduced where competitive forces reduce the need for shareholders to bear the costs of monitoring agents.     

Audit firm tenure and financial restatements: An analysis of industry specialization and fee effects

This study investigates the relation between audit firm tenure and clients’ financial restatements. Specifically, we extend the audit tenure literature by assessing restatement-based reporting failures using dimensions of auditor expertise and independence previously assumed to underlie short and long audit tenure problems. Short tenure expertise and independence effects are hypothesized using audit firm industry specialization and audit fees as proxies. Long tenure independence effects are hypothesized using nonaudit fees as a proxy. Using matched-sample logistic regression and 382 companies with and without financial restatements during 2000–2004, the results support prior findings by indicating a negative relation between the length of the auditor–client relationship and the likelihood of restatement. For short tenure engagements, we find that auditor industry specialization and audit fees are negatively related to the likelihood of restatement. This result is consistent with concerns about reduced audit quality due to a lack of client-specific knowledge and low audit fees on new audit engagements. Alternatively, the long tenure results indicate an insignificant relation between nonaudit fees and the likelihood of restatement. This finding contradicts independence concerns about nonaudit fees paid to entrenched auditors.     

Pricing and supplier concentration in the private client segment of the audit market: Market power or competition?

This study differs from prior audit-pricing studies as (1) it focuses on the issue of price competition in the (small) private client segment of the audit market and (2) addresses the questions of whether and how the audit-pricing model changed in that market between 1989 and 1997. Given the significant increases in market concentration and two big audit firm mergers in that period, we try to assess whether price competition (market power) has increased (decreased) or decreased (increased). We use Belgian data on privately owned companies from 1989 and 1997 for our analyses. We find that audit fees are significantly associated with the incumbent auditor's market share both in 1989 and 1997. Our results are in line with prior studies on public client samples and hence do not support prior assumptions that there are no price premia charged by large auditors in the small client segment of the audit market. As to the evolution of audit pricing in the private client segment of the Belgian audit market between 1989 and 1997, we find that the impact of various audit fee determinants changed significantly and report evidence supportive of increased price competition.     

An examination of the relation between market structure and the profitability of audit engagements

Due to increasing supplier concentration, there is growing concern regarding the lack of competition in the audit market. Theory based on Cournot oligopoly predicts that increasing concentration will facilitate monopolistic behaviour. Conversely, if the market for audit services has more in common with a Bertrand oligopoly, concentration may not lead to higher fees. We evaluate whether increased audit supplier concentration leads to economic rents by investigating audit profitability. Using proprietary data from a (then) Big 6 audit firm, we find that local market structure has a significant and positive association with audit profitability, but not auditor effort for large clients.     

Audit report lag: the role of auditor type and increased competition in the audit market

This study investigates the effect of auditor type (private vs. state) and increased competition in an audit market on audit report lag (ARL). This is the first study to provide evidence regarding the effect of audit market competition on ARL. Utilising structure–conduct–performance theory, we predict that competition pressures private auditors to be more efficient and to have less reporting lag than state auditors. We also predict that competition among auditors after a liberalisation period forces auditors to be more efficient and to record less ARL than before. We use a unique data set in Iran, whereby the audit market liberalisation (an audit market where services were previously provided primarily by a state entity) has resulted in both state and private auditors simultaneously providing audit services. The findings are consistent with the following hypothesis, that is ARL is shorter for private auditors than it is for state auditors, and ARL decreases as competition increases in the Iranian audit market. Consistent with the structure–conduct–performance theory, the findings suggest that increased competition in the audit market results in higher efficiency, as reflected by a shorter ARL.     

Yardstick competition and the political costs of raising taxes: An empirical analysis of Spanish municipalities

We test the ‘yardstick competition’ hypothesis by examining the effects of property tax increases, both in a given municipality and in other neighbouring jurisdictions, on the incumbents’ vote. In order to obtain unbiased estimates of the effects of raising taxes on voting patterns, we take into account national political shocks, the ideological preferences of the citizenship and government traits, and apply Instrumental Variables. The vote equation is estimated using a large database containing nearly 3,000 Spanish municipalities, and we analyse three local election results (1995, 1999 and 2003). Our results suggest that property tax increases, both at the municipal and neighbourhood level, have a non-negligible impact on the incumbent’s share of the vote. JEL Classification H71 · H73     

An application of data envelopment analysis to the evaluation of audit risk: a reinterpretation

This paper, which reinterprets previous work by Bradbury and Rouse (2002 ), addresses the risk quantification issue at an intuitive level. The insights provided by such quantification are discussed. Risk factors are associated with the risk-return concept. This allows measuring whether risks taken on are appropriately rewarded. The paper gives a non-technical exposition of DEA and outlines possible applications to accounting and finance. Using data for a large multinational, it shows how DEA analysis can be combined with internal audit procedures. It explains how the results obtained can be used to improve risk management.     

An empirical analysis of strategic competition and firm values the case of R&D competition

We operationalize a firm's competitive strategy through a new empirical measure, and develop a framework for empirical analysis of the market value of strategic behavior. Using this framework, we study announcement effects of R&D spending. The announcing firm's stock prices are positively influenced by a change in spending, and negatively by our competitive strategy measure (CSM). Competitors' stock prices are positively influenced by the interaction between the market's reaction to the announcing firm and the CSM. Our results are consistent with positive effects of ‘accommodating’ competition with strategic substitutes, and nonpositive effects of ‘tough’ competition with strategic complements.