Regulatory Spillovers in Common Audit Markets

48 Pages Posted: 19 Aug 2017 Last revised: 15 Mar 2019

See all articles by Raphael Duguay

Raphael Duguay

Yale School of Management; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Michael Minnis

University of Chicago - Booth School of Business

Andrew Sutherland

Massachusetts Institute of Technology; affiliation not provided to SSRN

Date Written: March 13, 2019

Abstract

We find that Sarbanes-Oxley (SOX) had two significant effects on the audit market for nonpublic entities. The first short-run effect stems from inelastic labor supply coupled with an audit demand shock from public companies. As a result, private companies reduced their use of attested financial reports in bank financing by 12%, and audit fee increases for nonprofit organizations (NPOs) more than doubled. The second long-run effect was a transformation in the audit supply structure. After SOX, NPOs were less likely to match with auditors most exposed to public companies, while auditors increasingly specialized their offices based on client type. Audit market concentration for NPOs dropped by more than half within five years of SOX and remained at this level through the end of our sample in 2013, while the number of suppliers increased by 26%. Our results demonstrate how regulation directed at public firms generates economically important spillovers for nonpublic entities.

Keywords: Sarbanes-Oxley, securities regulation, auditing, market structure, accounting, private firms, non-profits, labor economics

JEL Classification: H83, M12, M21, M41, M48, M49

Suggested Citation

Duguay, Raphael and Minnis, Michael and Sutherland, Andrew and Sutherland, Andrew, Regulatory Spillovers in Common Audit Markets (March 13, 2019). Chicago Booth Research Paper No. 17-24, MIT Sloan Research Paper No. 5234-17, Available at SSRN: https://ssrn.com/abstract=3020316 or http://dx.doi.org/10.2139/ssrn.3020316

Raphael Duguay

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511
United States

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Michael Minnis (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Andrew Sutherland

Massachusetts Institute of Technology ( email )

100 Main Street
Cambridge, MA 02142
United States

HOME PAGE: http://https://mitsloan.mit.edu/faculty/directory/andrew-gordon-sutherland

affiliation not provided to SSRN

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