Study On Industry Expertise For Auditor Firms And Auditing Market Performance

The main purpose of this paper is to provide theoretic and empirical study on auditor industry expertise's effect on audit market performance of China's audit market.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. Auditor industry expertise can help auditor firm to attain both the three objectives, so it is a main strategy and a main road to achieve competitive advantage for auditor firms.This paper systemically analyzes and tests the auditor industry expertise's effect on audit market performance in 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 auditor firms, thereby, they provide empirical evidences for the directions and degree of reform for China's audit market regulatory framework. The key findings of the research are summarized as below:(1) The effect of auditor industry expertise on audit pricing. Simunic(1980)'s framework for studying audit pricing is applied as the basic model. We use the data from 2001 to 2006 in China's A-Shares. Our empirical results suggest that auditor industry expertise charge lower than non specialists auditors. This indicates that specialists auditors achieve their competitive advantage by expanding their market share and reducing their costs through ecnomics of scale, but not by providing different product.(2) The effect of auditor industry expertise on earnings quality. We test the effect from two ways. First,we use the ERC model to test from the investors's point of view. Our empirical results indicate that the clients of specialist auditors have higher ERC than clients of nonspecialist auditors. This indicates investors acknowledge the specilization of audit firm and give auditor industry expertise high market response than no industry expertise auditors. Second, we use absolute DA to test the effect from the point of view of financial reports themselves. After controling other factor's effect on earnings management, we find auditor industry expertise is negatively correlated with absolute DA, this states that auditor industry expertise is positively correlated with earnings quqlity.The main academic contributions of this study are as follows: (l)We make up the structure to analyze the relation between auditor industry expertise and audit market performance after gathering and reading relevant literature the first time; (2) We use ERC to measure earnings quality, use China's data, prove the market performance of auditor industry expertise from the point of view of investors; (3) We use absolute DA to represent earnings quality, prove that auditor industry expertise can limit earnings management and improve earnings quality.