Product market competition and audit fees: evidence from the Chinese manufacturing industry

Zhenbo Zhang, Yuxuan Zhang and Mengfan Yan

Pacific Accounting Review, 2022, vol. 35, issue 2, 292-313

Abstract: Purpose - This paper aims to explore the impact of product market competition (PMC) on companies’ investment in external auditing. Design/methodology/approach - This paper applies a conceptual framework derived from demand–supply analysis and a panel data set of 2,263 listed manufacturing companies in China covering the period 2012–2019. In the assessment of PMC, this study measures industry-level competition intensity and company-specific market power separately. Findings - Industries appear to engage in a lower average level of external auditing if industrial competition intensity is either too high or too low. Similarly, companies spend less on external auditing if their market power is either too strong or too weak, and the company-level inverted U-shaped relationship is much more evident in industries with weak PMC. Originality/value - This paper shows that a company’s external audit strategy is affected by the level of competition it faces in its market. The findings of this paper can improve the current linear PMC–auditing theoretical framework and provide insights into the strategic auditing of listed companies in China. The findings also have significant implications for policy recommendations regarding corporate governance and market scrutiny regulations.

Keywords: Product market competition (PMC); External auditing; Audit fees; Chinese manufacturing company (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:parpps:par-11-2021-0180

DOI: 10.1108/PAR-11-2021-0180

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