Do Large Auditor Fee Premiums Exist in China's Local Audit Market?

Abstract

This paper investigates the audit firm brand name fee premium in China after controlling for auditor self-selection bias and allowing the coefficients of the audit fee determinants to vary between large and small audit firms. China offers an interesting setting to test this effect because unlike Western markets where Big 4 audit firms dominate the audit market, such firms command a very low market share in China. This allows us to examine whether the top 10 local auditors can earn a fee premium relative to the remaining (smaller) auditors and addresses Simunic and Wu (2009) who suggest that determinants of audit quality differences between local (non-Big 4) auditors would assist understanding of audit markets in other countries where the Big 4 market is limited. We find, that after controlling for self-selection bias, local top 10 audit firms earn a fee premium of around two percent. We also find a counterfactual fee premium for local top 10 firms who are industry specialist at both the national and provincial level.