Spatial Competition at the Intersection of the Large and Small Audit Firm Markets
- Resource Type
- Authors
- Nathaniel M. Stephens; Kenneth L. Bills
- Source
- AUDITING: A Journal of Practice & Theory. 35:23-45
- Subject
- Economics and Econometrics
050208 finance
business.industry
Intersection (set theory)
05 social sciences
Competitive pressure
Accounting
050201 accounting
Competitor analysis
Audit
Space (commercial competition)
Competition (economics)
0502 economics and business
Business
Market share
Finance
Industrial organization
Differential impact
- Language
- ISSN
- 1558-7991
0278-0380
SUMMARY In this paper, we study spatial competition in the U.S. audit market while accounting for its two-tiered nature. We provide evidence on the differential impact that market share distances within and between the players in the large and small audit markets have on competition. We find that the market share distance from small audit firm competitors has a greater effect on the Big 4's audit fees than distances from other Big 4 competitors. This finding suggests that small audit firms play a significant part in the competitive landscape in local markets. Further, we find that audit fees are increasing with the distance between a small audit firm and its closest competing small audit firm while audit fees are decreasing with the distance between a small audit firm and its closest competing large audit firm. This suggests that while obtaining separation in market space from competing small audit firms reduces competitive pressure from other small audit firms, as a small audit firm gets closer to the market space of a large audit firm it is perceived as being more like the larger audit firm and is able to obtain a fee premium like that attained by the larger audit firms. JEL Classifications: M4; M40; M41; M42; M49.