Small Audit Firm Mergers in the United States: Determinants and Consequences

The increased audit regulation in the era of Sarbanes-Oxley and the PCAOB, coupled with practitioner reports of “hyper-acquisitive” behavior among smaller firms, creates a dynamic environment in which to assess changes in the audit market. Against this backdrop, we examine the determinants and consequences of audit firm mergers, a topic about which little is known. We find that merger frequency increased significantly in the post-SOX period. In addition, we find that larger, higher quality, growing firms that operate in more competitive markets are more likely to acquire another firm. Acquisition targets, on the other hand, are smaller yet still relatively profitable firms. When these firms merge, we find that audit quality decreases for the successor firm, particularly among highly acquisitive buyers, suggesting a decreased focus on audit quality in the period immediately subsequent to the merger. Taken together, our results provide evidence regarding the determinants and consequences of audit firm mergers in the United States.