Determinants of Audit Market Instability: Supplier Collusion and Audit Leader’s Reputation Damage

• In Event: Audit Markets

Abstract

This study empirically examines determinants of audit market instability. In particular we investigate the effect of collusion between oligopolistic audit suppliers and damage to audit market leaders’ quality reputation. We hypothesize that audit firms that compete with a rival audit firm in multiple industry segments within the same geographical area (U.S. Metropolitan Statistical Area) are more likely to collude, whereas client concentration, the presence of a few very large clients, deters collusion. Furthermore, we argue that restatements by clients adversely affect an audit market leader’s high-quality reputation and in turn leads to higher market share instability. We measure audit market instability by two variables: which captures whether the audit market segment leader loses his leadership position to a rival, and ‘market share mobility’ which measures the total change in market share of all competing audit firms. We find that multimarket competition between suppliers and client concentration are associated with resp. lower and higher market instability. Finally, the leader’s reputation damage is positively related to leader dethronement but is not associated with market share mobility.

Authors

• Simon Dekeyser, KU Leuven

• Marleen Willekens, KU Leuven

• Ann Gaeremynck, KU Leuven