Jane Culvenor
University of Technology, Sydney
Donald Stokes
University of Technology, Sydney
Ming Wu
University of Technology, Sydney
Abstract: This study investigates implications of Big 5 audit pricing under spatial oligopolistic competition theory. Spatial theory recognizes that, in equilibrium, Big 5 audit firms choose market niche specializations that differ from their competitors and thereby earn economic rents. A client's audit fee depends on the closest competing auditor's cost of servicing that client, where closeness is measured in n-dimensional client characteristics space. This implies that the spatial distance between audit firms' specializations and clients' characteristics can influence audit fees. We develop an audit-pricing model capturing the effect of the spatial distance between the client and its next closest available competing Big 5 auditor relative to the spatial distance between the client and its incumbent auditor. Using Australian data, we find evidence of Big 5 audits being priced consistent with spatial oligopolistic competition theory.
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