Local accounting firms’ pricing responses to entry of the Big Four accounting firms into China
Journal of Accounting in Emerging Economies
ISSN: 2042-1168
Article publication date: 1 February 2016
Abstract
Purpose
The historical development and size of China’s audit market provides an opportunity to investigate important questions regarding the functioning of the market for audit services that are difficult, if not impossible, to test in other globally established markets. The purpose of this paper is to examine the effect of the market entry of the Big Four accounting firms into China on the audit fees charged by its local accounting firms.
Design/methodology/approach
In this paper the authors rely primarily on the incumbent pricing literature (Simon, 2005; Geroski, 1995) to assist them in developing the specific hypotheses and empirical tests. This paper is an empirical study, which examines whether local incumbent accounting firms cut prices in response to the Big Four’s entry by using data from annual reports and audit reports for China’s listed companies from the 1994 to 2008 period.
Findings
This study shows that local incumbent firms cut prices post-entry. This study also finds that it was local large-sized accounting firms as well as accounting firms located in regions with highly developed- and competitive markets that cut prices in response to the Big Four’s entry.
Practical implications
This study has important implications for the Big Four accounting firms as it provides useful information about pricing strategies that would likely be used by local accounting firms in a new market. Local accounting firms in emerging markets can also gain useful insights about the pricing strategies adopted by the Big Four accounting firms when they enter a market.
Originality/value
Audit market research has little to offer on how local accounting firms respond in their pricing to the entry of Big Four accounting firms into their market, mainly because in western countries such as Canada, England, and the USA, the Big Four accounting firms are the oldest firms operating in those markets. This paper is the first study that examines the effect of the market entry of the Big Four accounting firms into China.
Keywords
Acknowledgements
The authors acknowledge that financial supports have been received from CA/Laurier Research Centre. The authors thank two anonymous reviewers for their insight comments and suggestions. The paper benefits from comments by discussant Louise Hayes as well as those of other participants at 2012 CAAA Annual Conference.
Citation
Desai, V., Xu, B. and Zeng, T. (2016), "Local accounting firms’ pricing responses to entry of the Big Four accounting firms into China", Journal of Accounting in Emerging Economies, Vol. 6 No. 1, pp. 50-68. https://doi.org/10.1108/JAEE-06-2013-0030
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited