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Is there a dark side of competition? Product market competition and auditor-client contracting

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  • Li, Tianpei (Constance)
  • Walton, Stephanie

Abstract

This study establishes the informational value of a company's product market competition, derived from qualitative nonfinancial disclosures, in the audit contracting process. Greater product market competition could either serve as means of mitigating agency costs between managers and shareholders or heightening managerial rent-seeking activities and the incentive to distort disclosures. Consequently, greater competition could either increase or decrease audit engagement risk. We find that greater product market competition is associated with greater engagement risk. Auditors respond to the higher risk by assessing greater audit fees. Although auditors respond by charging higher fees and dedicating greater effort to these engagements, we nonetheless find that audit quality is negatively affected by greater competition. Our findings are consistent with the dark side hypothesis of product market competition. Overall, our study provides evidence that company-level competition effects convey valuable information to auditors.

Suggested Citation

  • Li, Tianpei (Constance) & Walton, Stephanie, 2023. "Is there a dark side of competition? Product market competition and auditor-client contracting," Advances in accounting, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:advacc:v:62:y:2023:i:c:s0882611023000172
    DOI: 10.1016/j.adiac.2023.100658
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    More about this item

    Keywords

    Product market competition; Audit risk; Audit quality; Agency costs;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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