Determinants of Price Competition within Accounting Associations and Networks

• In Event: Audit Markets and Capital Markets

Abstract

Associations and networks between smaller firms are suggested as a solution for small audit firms to overcome the barriers of auditing large public companies. However, the stability of those accounting associations and networks (AAN) is also challenging because of coopetition (Gnyawali and Charleston 2018), i.e. the simultaneous co-existence of cooperation and competition between members. Although coopetition provides multiple benefits for AAN members, it can also cause opportunism and rivalry resulting into more aggressive price competition between members (Gulati 1998). In this study we investigate how AAN characteristics, specifically the governance structure, resource diversity and geographic proximity, determine the level of price competition within AAN. Using a hand-collected data set of listed US clients audited by AAN member firms over the period 2015-2019, we find that network members charge higher fees as compared to association members. This result suggests that in a network the higher organizational proximity, i.e. a more hierarchically organized alliance, as well as higher institutional proximity, i.e. having common mission and goals, result into less tensions, opportunistic behavior and as such less fierce competition between member firms. Furthermore, findings suggest that the level of resource diversity in an AAN is positively associated with the level of audit fees, suggesting that the intensity of rivalry within AAN with higher levels of product differentiation is lower. Finally, we also find that audit fees are lower when the geographic distance between the members of the AAN is short, suggesting that they compete more for the same pool of clients. Additional analyses suggest that neither the governance structure nor the geographic proximity are drivers of quality differences, i.e. discretionary accruals, which suggest that the competitive actions AAN member firms take in response to their rivals, explain the audit fees differences. However we do find that resource diversity of AAN drives quality differences, which perhaps underlines the importance of knowledge spillovers within AAN. The results are robust to the use of entropy balancing, propensity score matching, and exclusion of second-tier audit firms. Our findings should be interesting for small firms considering to join an AAN, as they show that less fierce competition between members occurs when they choose a network and not an association, choose AAN which enlarge the diversity of services offered and which also offer geographic exclusivity for members to limit the rivalry and encourage cooperation.

Author

• Ditmir Sufaj, Katholieke Universiteit Leuven