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

Workshop’s Topic: This study provides new insights into the extent of switching costs in auditing. We use a discrete choice approach to infer switching costs from the client’s choice of auditor. The demand estimate shows that switching costs matter and that they differ by direction, with switching from non-Big 4 to Big 4 auditors being associated with the highest switching costs. Counterfactual analyzes of forced auditor switching show that switching costs are substantial, ranging from $0.7 billion (14.2% of audit fees) to $1.2 billion (24.0% of audit fees) when allocated to all clients. Counterfactual analyzes of voluntary auditor switching show that the audit market would become very dynamic and more concentrated if switching costs were eliminated. Furthermore, in this scenario, clients would realize a consumer surplus of up to 306 million US dollars (5.4% of audit fees). Overall, our study demonstrates the important role of switching costs in understanding the dynamics of the audit market.

Time and Location: 14:00-17:00 PM (GMT+8), Room A423 (School of Management)

Language: Bilingual (Chinese and English)

Introduction of Speakers

Prof. ZHU Aiyong

Southwest University of Finance and Economics, School of Accounting

Zhu Aiyong, professor at the School of Accounting of Southwest University of Finance and Economics, was selected for the "Guanghua Hundred Talents Plan" of Southwest University of Finance and Economics. He received his PhD in Economics from the University of Mannheim in Germany in 2014. During his doctoral studies, Prof. Zhu attended Yale University from 2010 to 2011 and was a visiting scholar at Deutsche Bundesbank from 2012 to 2014. From 2014 to 2022, he worked at the School of Economics and Management at Wuhan University. From 2019 to 2021, he was a visiting professor at the University of Mainz in Germany. Prof. Zhus main research direction is audit demand and competition in the capital market. He has published in journals such as Review of Accounting Studies and The Accounting Review and was also the director of the National Natural Science Foundation Youth Program.