This paper examines IPO audit fees to assess the use of industry specialization as a differentiation strategy by audit firms. We extend existing theory on the impact of industry specialization on audit fees by incorporating Porter's (1985) theory of competition and differentiation. We suggest that market share enables audit firms to gain competitive advantages in terms of cost and service. However, the impact of such advantages on fees depends on whether the audit firm has successfully differentiated itself from competitors within client industries. Our results indicate that as audit firm industry market share increases without a differentiation in market share, the audit fee charged for a given IPO decreases. In the context of Porter (1985), this result suggests that the client is able to bargain for a portion of the auditor's cost savings because the audit firm has not successfully differentiated itself from competitors. In contrast, we show that audit firms that possess significantly higher market shares than their industry competitors earn fee premiums, suggesting that audit firms that have successfully differentiated themselves retain a stronger bargaining position with their clients.
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1 September 2003
Research Article|
September 01 2003
Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public
Brian W. Mayhew, Assistant Professor;
Brian W. Mayhew, Assistant Professor
aUniversity of Wisconsin–Madison.
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Michael S. Wilkins, Professor
Michael S. Wilkins, Professor
bTexas A&M University.
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Online ISSN: 1558-7991
Print ISSN: 0278-0380
American Accounting Association
2003
AUDITING: A Journal of Practice & Theory (2003) 22 (2): 33–52.
Citation
Brian W. Mayhew, Michael S. Wilkins; Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public. AUDITING: A Journal of Practice & Theory 1 September 2003; 22 (2): 33–52. https://doi.org/10.2308/aud.2003.22.2.33
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