Auditor merger, audit quality and audit fee: evidence from the PricewaterhouseCoopers merger in the UK

Focusing on the merger of Price Waterhouse and Coopers& Lybrand in 1998, we document increased audit quality (measured by earnings quality of the clients) for the merged firm and other big-X auditors at that time in the post-merger period as 1) income-decreasing mechanism (negative discretionary accruals) is used to a greater extent; 2) value relevance of earnings and earnings change has significantly increased and 3) earnings smoothing becomes less prominent. Furthermore, we find evidence that in the post-merger period there is a significant increase in audit fee for PricewaterhouseCoopers and other big-X client firms, which suggests that the effect of collectively enhanced market power of big-X auditors (which tends to increase audit fee) dominates the effect of cost savings from the merger (which tends to lower audit fee). The results have implication for regulators and policy makers.
[abstract as it appears on publisher's website]