The Effects of Client Bargaining Power on Audit Pricing in Voluntary and Involuntary Audit Switching Environment

This paper employs the dissolution of two major Japanese audit firms to identify voluntary and involuntary audit switching behavior and how does it affect the interaction between client bargaining power and audit pricing. Using a sample of listed Japanese companies from 2005 to 2015, we find that clients with high bargaining power switching to smaller auditors pay lower audit fees compared to clients not switching auditors. The leverage power of buyers' bargaining power in negotiating fees is comparable between involuntary and voluntary switching auditors. In the long-term, the clients' bargaining power leverage to lower audit fees is enhanced for clients who involuntarily switched to audit firms affiliated with the defunct auditors. However, clients with weaker bargaining power lose their leverage power as audit market supply constraints increased in the Big 3 period. This study contributes to the debate on the effect of mandatory audit firm rotation regulation on audit pricing as our paper provides a quasi-controlled environment that compares companies in voluntary and involuntary audit switching environment