An Empircal Study On Audit Pricing In Binary Market

Further privatization of state-owned enterprises and more overseas listings of Chinese firms are fostering both the supply of and demand for high quality auditors since early 2000s. Extant empirical studies focus mainly on the existence of a fee premium for large audit firms and whether this fee premium is due to the reputation of the auditor or their dominant position in the market, the results are inconclusive at best. Taking advantage of the binary structure of the B-share audit market in China, using audit fee date from 2003 to 2006,We find that in the supplementary market the Big4 earn a significant audit fee premium, and they do earn a significant audit fee premium in the competitive statutory market. Moreover, we also find that Big4 earn a significant audit fee premium both from the big-size clients and small-size clients in the supplementary market; in the statutory market, Big4 can only earn a audit fee premium from the big-size clients but can not from the small-size clients . In addition, the audit pricing of the Big4 in the supplementary market is significantly higher than it is in the statutory market; however, the audit fees of the non-Big4 auditor are not significantly different in the statutory and supplementary market .Combining the finding with the former results from this paper, we conclude that Big4 audit firm can earn a fee premium both in the supplementary and the statutory audit market ,in which there is competitive, so the premium earned by the Big4 is not from strong market power but from the reputation.Our results suggest that the audit fee premium earned by the Big4 is more likely to be due to their reputation than their dominant position. And the results indicate that the reputation of the auditor is playing a more and more role in the audit market.