Working Paper: The Effects of Non-Big 4 Mergers on Audit Efficiency and Audit Market Competition

​Paper Author: Andrew Kitto

Abstract: Regulators and economists are often concerned with mergers and acquisitions (M&A) because of their potential to reduce competition by decreasing the number of suppliers and consolidating market share. However, Stigler (1955) points out that in certain situations, mergers may increase competition even when they raise concentration and reduce an already small number of suppliers. This situation may arise when smaller firms are relatively inefficient and can only reasonably compete with larger rivals by merging. In this study, I examine whether mergers between small and midsize accounting firms influence audit market competition by increasing the number of firms that can efficiently compete for public clients. Using a proprietary dataset provided by the PCAOB, I find evidence that in-market mergers (involving auditors that operate in the same geographic market) generate efficiencies that are reflected in a post- merger reduction in audit hours but not audit quality. Mergers benefit clients because cost-savings are passed on to clients in the form of lower prices rather than captured as economic rents. In contrast, I find no evidence of efficiencies resulting from out-of-market mergers, suggesting that it may be difficult to create synergies when auditors do not have overlapping operations. Collectively, these findings suggest that in-market mergers create efficiencies and bring new aggressive competition to the U.S. public- company audit market.

Download the Paper


The economic research fellows and staff economists generate high-quality working papers that inform the oversight activities of the PCAOB and are disseminated to stimulate discussion and critical comment to the benefit of the public. Working papers are preliminary materials that have not been approved by the Board and reflect only the views of the author(s).

The research topics of economic research fellows, including a description of any nonpublic data sets required for research, are presented to the Board for approval and research papers are reviewed to confirm that the topic of the paper is consistent with the researcher's proposal. That review does not, however, encompass an evaluation of the conclusions reached by researchers.