Barriers to entry to the big firm audit market: Evidence from market reaction to switches to second Tier audit firms in the post-sox period |
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Authors: | Charles P Cullinan Hui Du Xiaochuan Zheng |
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Institution: | 1. Morristown Medical Center, Morristown, NJ, United States;2. Christus Spohn/Texas A&M School of Medicine, Corpus Christi, TX, United States;3. Emergency Medical Associates Research Foundation, Parsippany, NJ, United States;4. St. Luke''s Warren Campus, Phillipsburg, NJ, United States |
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Abstract: | The US Government Accountability Office (GAO) studied concentration in the audit market and found that the Big 4 firms continue to dominate the market for clients with revenue of more than $500 million while non-Big 4 firms have gained market share among clients with revenue of $500 million or less (GAO, 2008). The US Treasury Advisory Committee on the Auditing Profession has expressed concern about barriers to entry that might prevent a non-Big 4 firm from increasing its market share among large publicly-traded clients (Advisory Committee, 2008). One of these barriers may be the potential cost to shareholders if the stock market reacts negatively to the appointment of a non-Big 4 auditor (GAO, 2003). We examine whether the stock market reacts negatively when clients switch from a Big 4 to a non-Big 4, because a negative reaction might make such switching less likely to occur. We find that the market does not react more negatively when clients move from a Big 4 to a Second Tier auditing firm than when clients move from a Big 4 to another Big 4 firm. Our results suggest that a negative market reaction may not represent a significant barrier to entry among Second Tier auditing firms. |
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