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Product market competition, industry homogeneity and the demand for audit services
Sudarshan Jayaraman,
University of North Carolina at Chapel Hill
ABSTRACT. This paper examines how product market competition influences the demand for audit services. While some theories propose that competition disciplines managers and reduces the demand for costly monitoring, an alternate view purports that competition forces managers to undertake censured activities which increase the demand for monitoring. I find that the empirical relation between competition and audit fees depends on the degree of industry homogeneity. In homogenous industries where relative performance evaluation is more effective, competition reduces audit fees. On the other hand, competition increases audit fees in heterogeneous industries. These results provide a possible reconciliation between the competing theories.
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