The effect of audit market deregulation on audit competition and quality

Purpose: This paper examines the effect of minimum audit fee reserve deregulation on audit quality.Specifically, we examine the impact of the 2011 audit fee deregulation in Greece.Design/methodology/approach: Our sample consists of 120 firms listed on the Athens Stock Exchange, from twelve industries.The period of observation is 10 years, with 1.200 firm-year observations.The examined period is divided into the five years prior to the deregulation (2007)(2008)(2009)(2010)(2011) and those after it (2012-2016) to illustrate the impact of the audit deregulation.We use earnings quality as an audit quality proxy, set various independent variables as suggested by existing literature and conduct a difference in difference (DID) analysis and robustness tests.To estimate abnormal accruals we use the same model as Han and Wang (1998). Findings:Our results indicate a statistically significant negative relationship between audit quality and deregulation, which suggests that augmented competition of audit firms has a negative effect on audit quality. Originality/value:This study adds the case of Greece to the existing literature on the impact of audit deregulation on audit quality.The results corroborate the stream of research that finds a positive association between audit fee deregulation and audit quality decrease.To the authors' best knowledge, this is the first similar study conducted in a European economy.In addition, our findings suggest that policy makers should carefully plan deregulations especially in jurisdictions with an emerging capital market distinguished by a low degree of supervisory effectiveness and poor investor protection mechanisms.