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Transaction costs and competition among audit firms in local markets |
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| Authors: | Ling Chu Dan A Simunic Minlei Ye Ping Zhang |
| Institution: | 1. School of Business and Economics, Wilfred Laurier University, 75 University Avenue West, Waterloo, ON, N2L 3C5 Canada;2. Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC, V6T 1Z2 Canada;3. Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, ON, M5S 3E6 Canada |
| 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. |
| Keywords: | Audit pricing Competition Transaction costs |
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