The Joint Impact of Structural Market Characteristics on Audit Quality and Audit Pricing : An Empirical Analysis of US Audit Markets

This study explores the association between audit market concentration, audit quality, and audit fees in US audit markets. It contributes to the extant literature by modelling the interactive effects of the structural characteristics of audit markets on audit quality and pricing. Based on a large sample of audit clients from 138 metropolitan statistical areas (MSAs) from 2004 to 2016, this study provides instance for an overall positive (negative) association between audit concentration and audit quality (audit pricing). However, improvements in audit quality are less significant in large markets, where auditors have a greater number of clients, even when concentration is low. Concerning the pricing of audit services, greater concentration leads to competitive cost efficiencies (lower audit fees) because of improved economies of scale; however, this is only when audit markets are small. When markets are large and concentrated, greater audit market concentration is associated with higher (monopolistic) audit fees. This is indicative of a trade-off between economies of scale and market domination