The Structure, Behavior And Performance Of Chinese Audit Market

The main purpose of this paper is to provide theoretic and empirical study on the structure, behavior, and performance of China's audit market. This paper applies the structuralism of industry analysis to China's audit market research, and explores the mutual relations between the structure, behavior, and performance of audit market. It points out that the main difference between audit market and other industry organizations is that economies of scale, product differentiation, and diversification constitute the main factors of audit market structure, accordingly, they constitute the main factors of audit market's behavior and performance. This analysis framework can provide referencable paradigm for future deep research on China's audit market.This paper systemically tests the competitive behavior and pricing mechanism of China's audit market, these tests'results can provide empirical evidences for understanding the competitive nature of China's audit market and market behaviors of audit firms, thereby, they provide empirical evidences for the directions and degree of reform for China's audit market regulatory framework. The main contributions include: (1) This paper firstly applies Porter's theory of competitive strategy to analyze audit firm's competitive behaviors in China's audit market, and empirically test the effect of auditor industry specialization and client bargaining power on audit pricing. Its empirical results support that audit firms can adopt industry specialization as their effective competitive strategy. (2) This paper firstly uses the data of China's audit market to test two competing theories of DeAngelo(1981) and Dye(1991), and observes the effects of initial audit engagements and different types of audit changes on audit pricing. Its empirical results have important public policy implications related to auditor independence. (3) This paper firstly bases demand-oriented perspective to test the effect of public company's governance mechanism on audit pricing. Its empirical results indicate that China's public companies'ownership structure and their control rights arrangement can produce significant governance effect on external audit demand, but the empirical results don't support that China's current board system, especially independent director and audit committee related institutions, can produce significant governance effect on external audit demand.Moreover, this paper firstly studies the effect of auditor industry specialization and economic dependence on audit quality to test the performance of China's auditmarket primarily. Its empirical results indicate that industry specialists have higher audit quality than non-industry specialist, and auditor's economic dependence doesn't produce significant adverse effect on audit quality. These empirical results support that extending the size of audit firm and strengthening industry specialization can improve the performance of China's audit market.