Switching Costs and Market Power in the Auditing: Evidence from a Structural Approach

Speaker: Prof. ZHU Aiyong

Venue: A423, School of Management, Zijingang Campus

Abstract: 

This study provides novel evidence on the magnitude of switching costs in auditing. We use a discrete choice approach to infer switching costs from clients’auditor choices. The demand estimation reveals that switching costs matter and that they differ by the direction with switching from non-Big 4 to Big 4 auditors being associated with the greatest switching costs. Counterfactual analyses of forced auditor switches indicate that switching costs are substantial, ranging from 0.7 billion US dollars (14.2% of audit fees) to 1.2 billion US dollars (24.0% of audit fees) when aggregated across all clients. Counterfactual analyses of voluntary auditor switches show that the audit market would become highly dynamic and more concentrated if switching costs were removed. Furthermore, clients would gain consumer surplus of up to 306 million US dollars (5.4% of audit fees) in this scenario. Overall, our study documents the important role of switching costs to understand audit market dynamics. 

The link of the paper is: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4166004.