IDEAS home Printed from
   My bibliography  Save this article

The effect of concentration and regulation on audit fees: An application of panel data techniques


  • Evans, Lawrance
  • Schwartz, Jeremy


The financial audit – which is mandatory for publically traded companies – plays an important role in the transparency and efficiency of global capital markets. Yet, the cost of complying with the laws and regulations requiring financial statement review by external auditors can be substantial. Moreover, the supply-side of the audit market is dominated by a few firms. As a result, policymakers in many countries have an interest in considering the cost of additional regulation as well as ensuring that the concentrated nature of the audit market does not result in anti-competitive pricing. The goal of this paper is to provide new estimates of the extent to which regulation and market concentration have contributed to higher audit fees using a panel data approach. To accomplish this we use U.S. data from 2000 to 2010, a period that includes a large change in market concentration as a result of the collapse of the third largest auditor in 2002. In addition, the passage of the Sarbanes–Oxley Act (SOX) in 2002 in response to a series of accounting scandals, allows us to exploit an abrupt change in the regulatory environment. We find that the cost of additional regulation has been substantial and persistent. In addition, our results support the notion that the burden is larger for smaller firms. This was the rationale for exempting the smallest firms from the most costly provisions of SOX by the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd Frank). However, our results suggest that greater market concentration has only a very small impact on the fees of large clients, suggesting that fears that market power would generate higher fees are largely unwarranted.

Suggested Citation

  • Evans, Lawrance & Schwartz, Jeremy, 2014. "The effect of concentration and regulation on audit fees: An application of panel data techniques," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 130-144.
  • Handle: RePEc:eee:empfin:v:27:y:2014:i:c:p:130-144 DOI: 10.1016/j.jempfin.2013.10.007

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Hausman, Jerry A & Wise, David A, 1979. "Attrition Bias in Experimental and Panel Data: The Gary Income Maintenance Experiment," Econometrica, Econometric Society, vol. 47(2), pages 455-473, March.
    2. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    3. Emilie Feldman, 2006. "A Basic Quantification of the Competitive Implications of the Demise of Arthur Andersen," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(3), pages 193-212, November.
    4. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    6. Ahmed, Anwer S. & McAnally, Mary Lea & Rasmussen, Stephanie & Weaver, Connie D., 2010. "How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability," Journal of Corporate Finance, Elsevier, vol. 16(3), pages 352-369, June.
    7. Baltagi, Badi H. & Wu, Ping X., 1999. "Unequally Spaced Panel Data Regressions With Ar(1) Disturbances," Econometric Theory, Cambridge University Press, vol. 15(06), pages 814-823, December.
    8. Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1041-1061, October.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9429-8 is not listed on IDEAS

    More about this item


    Audit fees; Panel data; Market power; Market concentration; Sarbanes–Oxley (SOX); Dodd–Frank;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L8 - Industrial Organization - - Industry Studies: Services
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:27:y:2014:i:c:p:130-144. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.