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Product market competition and audit fees: evidence from the Chinese manufacturing industry

Zhenbo Zhang (School of Public Administration, Nanjing Audit University, Nanjing, China)
Yuxuan Zhang (School of Public Administration, Nanjing Audit University, Nanjing, China)
Mengfan Yan (School of Public Administration, Nanjing Audit University, Nanjing, China)

Pacific Accounting Review

ISSN: 0114-0582

Article publication date: 23 December 2022

18

Abstract

Purpose

This paper aims to explore the impact of product market competition (PMC) on companies’ investment in external auditing.

Design/methodology/approach

This paper applies a conceptual framework derived from demand–supply analysis and a panel data set of 2,263 listed manufacturing companies in China covering the period 2012–2019. In the assessment of PMC, this study measures industry-level competition intensity and company-specific market power separately.

Findings

Industries appear to engage in a lower average level of external auditing if industrial competition intensity is either too high or too low. Similarly, companies spend less on external auditing if their market power is either too strong or too weak, and the company-level inverted U-shaped relationship is much more evident in industries with weak PMC.

Originality/value

This paper shows that a company’s external audit strategy is affected by the level of competition it faces in its market. The findings of this paper can improve the current linear PMC–auditing theoretical framework and provide insights into the strategic auditing of listed companies in China. The findings also have significant implications for policy recommendations regarding corporate governance and market scrutiny regulations.

Keywords

Acknowledgements

Zhenbo Zhang is thankful for the financial support of the Chinese National Funding of Social Sciences (Grant No. 21CZZ016).

Citation

Zhang, Z., Zhang, Y. and Yan, M. (2022), "Product market competition and audit fees: evidence from the Chinese manufacturing industry", Pacific Accounting Review, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/PAR-11-2021-0180

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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