Low balling and learning effects
In many audit market segments competition is severe. Accordingly, the goal of the paper is to analyze the interaction of fees in equilibrium, audit time and clients‘ waiting time and their joint impact on the market‘s competition structure. Therefore, it is assumed that fee setting in equilibrium is characterized by the phenomenon of low balling. Further, audit times and waiting times are described by deploying the theory of learning curves. As a major contribution a formal condition for identifying audit market segments facing competition is derived. Further, we quantify the expected duration of low balling depending on the intensity of client specific learning, and demonstrate that fee cutting is not necessary for low balling to be prevalent. The paper provides insights for further empirical research on low balling and points at audit market segments needing specific attention by regulatory bodies.
Investor protection in the sense of good corporate governance relies heavily on audit services, although audit functions differ slightly among national legal or economic contexts. For example, given equity-financed companies, such as found in ...