Barriers to entry to the big firm audit market: Evidence from market reaction to switches to second Tier audit firms in the post-sox period

Charles P. Cullinan, Hui Du and Xiaochuan Zheng

Research in Accounting Regulation, 2012, vol. 24, issue 1, 6-14

Abstract: The US Government Accountability Office (GAO) studied concentration in the audit market and found that the Big 4 firms continue to dominate the market for clients with revenue of more than $500 million while non-Big 4 firms have gained market share among clients with revenue of $500 million or less (GAO, 2008). The US Treasury Advisory Committee on the Auditing Profession has expressed concern about barriers to entry that might prevent a non-Big 4 firm from increasing its market share among large publicly-traded clients (Advisory Committee, 2008). One of these barriers may be the potential cost to shareholders if the stock market reacts negatively to the appointment of a non-Big 4 auditor (GAO, 2003). We examine whether the stock market reacts negatively when clients switch from a Big 4 to a non-Big 4, because a negative reaction might make such switching less likely to occur. We find that the market does not react more negatively when clients move from a Big 4 to a Second Tier auditing firm than when clients move from a Big 4 to another Big 4 firm. Our results suggest that a negative market reaction may not represent a significant barrier to entry among Second Tier auditing firms.

Keywords: Barriers to entry; Auditor switching; Second Tier audit firms; Market reaction (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reacre:v:24:y:2012:i:1:p:6-14

DOI: 10.1016/j.racreg.2011.12.002

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