SUMMARY

This study examines how audit fee stickiness varies with changes in market competition in China and its effect on audit quality. The Chinese audit market structure has changed significantly since the Chinese Institute of Certified Public Accountants (CICPA) issued a proposal to enhance the competitiveness of large domestic audit firms by promoting the consolidation of domestic audit firms in 2007. Using a sample of Chinese listed firms, we find a decrease in upward stickiness and an increase in downward stickiness as market concentration increases in the post-Proposal period. The asymmetry between upward and downward fee stickiness is greater in local markets that are more dominated by the top 10 domestic auditors. Moreover, we find that upward (downward) fee stickiness has a negative (positive) association with audit quality as measured by earnings management and auditor reporting conservatism.

JEL Classifications: D40; M42.

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