Can Audit Industry Market Share be Bought?

• In Event: Audit Markets 1

Abstract

Most prior literature assumes that auditors gain market share by developing industry specialization which then attracts new clients. However, recent literature suggests that auditors fall backwards into specialization after serving large industry clients over time. One way an auditor can actively gain industry market share is by acquiring a specialized competitor. Using a unique setting where an auditor acquires a competitor specifically to gain market share, we evaluate the consequences of the acquisition to gain insight into the dynamics of audit industry market share and specialization. Overall, we find little evidence that purchasing a competitor is a successful method for gaining market share. Our results show the number of clients switching to the acquiring auditor increases following the merger, however we find that this is more than offset by an increase in the number of clients switching from the acquiring auditor. Additional analyses show that a poor fit between the acquiring (large) auditor and the acquired clients leads to the loss of many (small) acquired clients. Our study casts further doubt on the likelihood that auditors intentionally develop or obtain industry specialization which then attracts clients, and suggests that even a major purchase of a specialized competitor provides limited benefits for the acquiring auditor’s market share or industry specialization.

Authors

• Paul Mason, Baylor University

• Steve Utke, University of Connecticut