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    Spatial Competition at the Intersection of the Large and...
    research summary posted June 15, 2016 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 05.0 Audit Team Composition, 05.08 Impact of Office Size 
    Spatial Competition at the Intersection of the Large and Small Audit Firm Markets
    Practical Implications:

     This study illustrates new measures of spatial competition that incorporate the separate and distinct effects of competition within and between the large and small audit markets. This study also provides evidence that the pricing in the large firm market segment is affected by competitive pressure from small audit firms; furthermore, the study provides evidence of a differentiation premium that small audit firms are able to obtain by being perceived as competing in a bigger league than other small audit firms. Finally, the study contributes by examining measures of competition beyond the Herfindahl index in the audit firm market.


    Bills, K.L. and N.M. Stephens. 2016. Spatial Competition at the Intersection of the Large and Small Audit Firm Markets. Auditing: A Journal of Practice and Theory 35 (1): 23-45.

    spatial competition, market for audit services, market space, differentiation, small audit market
    Purpose of the Study:

    Research in the past including a study performed by the Government Accountability Office (U.S. GAO) of the United States suggest that the large and small audit firm markets are two distinct markets in many respects; however, prior research also suggests that there is a component of the small audit firm market that competes for clients directly with firms operating in the large audit firm market.  Within this study, the authors create measures of competition that take into account these two distinct markets and how their interaction may affect the competitive positions of the players in both markets.  This is achieved by separately examining spatial competition within and between audit firms in both the large and small audit firm markets. Because the Department of the Treasury has emphasized the importance of small audit firms becoming viable suppliers for companies typically served by the large audit firm market, there is a need for a closer look at the smaller audit firm market and how its members can potentially compete with larger audit firms. 

    Design/Method/ Approach:

    Data from Audit Analytics and Compustat was used to perform the tests of the hypotheses. Two separate samples were constructed– one sample including large audit firm clients and another sample including small audit firm clients. Large audit firms are defined as the Big 4 audit firms, and small audit firms are defined as all non-Big 4 audit firms.

    • The authors find that the audit fee large audit firms charge decreases with the success of small audit firms at aligning themselves with the large firms in their market space.
    • The authors’ findings suggest that spatial competition from small audit firms significantly impacts the large audit firm market; in fact, spatial competition from small audit firms has a greater effect on the large audit firm market than spatial competition from other large audit firms.
    • The authors find that small audit firms that enter the large audit firm market and are perceived as being competitors with the Big 4 firms can improve their competitive positions as compared to other small audit firms.
    • The authors find that small audit firms benefit from obtaining market shares similar to those of large audit firms, whereas large audit firms are harmed by the added competition.
    • The authors find that distance from the closest competitors by market share is an important factor of competition in the small audit firm market; however, it is important to determine distance from whom, large audit firm or small audit firm, as they have opposite signs. 
    Audit Team Composition, Client Acceptance and Continuance
    Audit Fee Decisions, Impact of Office Size