Academic journal article The International Journal of Business and Finance Research

Financial Performance of Audit Firms in Different Life Cycle Stages: Evidence from Taiwan

Academic journal article The International Journal of Business and Finance Research

Financial Performance of Audit Firms in Different Life Cycle Stages: Evidence from Taiwan

Article excerpt

ABSTRACT

This study is the first to compare the financial performance of audit firms at different life cycle stages in distinct market segments. In terms of market segmentation, total samples are categorized into three subsamples: large, medium, and small audit firms. Based on the Taiwanese auditing industry data set, this study validates that organizational life cycles exist in audit firms, which includes young, adult, and old stages. Further, this study documents that financial performance of the three sub-samples is different at each life cycle stage. Finally, financial performance of the three sub-samples varies at the same life cycle stage. With results, this study contributes knowledge to the business-related literatures.

JEL: M41

KEYWORDS: Audit Firms, Organizational Life Cycles, Market Segmentation, Financial Performance

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In recent decades, audit market has been increasingly competitive around the world. For example, the Taiwanese Financial Supervisory Commission indicates that the number of practicing accountants increases approximately 140% from 726 in 1989 to 1,738 in 2007, and the number of audit firms increases approximately 97% from 433 in 1989 to 854 in 2007. A highly competitive market environment makes an organization to grow and expand (Child 1972). To respond to the changing market, audit firms adjust their business structures and operating strategies to survive and sustain competitiveness. Prior studies indicate that the development of an organization can be explained from the viewpoint of life cycle and it follows a predictable pattern that can be characterized by a variety of stages.

These stages are sequences of event that describes how things change over time, a hierarchical progression that is not easily reversed, and various organizational activities and structures (Quinn and Cameron 1983; Kleiner and Corrigan 1989; Van De Ven 1992; Dodge, Fullerton, and Robbins 1994). Every organization has a natural life cycle similar to a living organism (Adizes 1979). Organizations face a unique set of challenges at each new stage of life cycle and adjust their business strategies and organizational structure to adapt to the new life cycle stage (Dodge, Fullerton, and Robbins 1994). The organizational life cycle concept has been applied to management and capital market-related studies (Quinn and Cameron 1983; Anthony and Ramesh 1992; Ritter and Welch 2002; Cohen, Mashruwala, and Zach 2010). However, the concept rarely applies to the service industry such as audit firms.

This motivates us to answer the first question in our analysis. Whether audit firms have an organizational life cycle?Audit firms are typically a professional service organization and provide services by auditors with expertise (Morris and Empson 1998; Gibbins and Wright 1999). Audit firms are often grouped by size and then result in various service provisions. In terms of market segmentation and based on prior studies (Ghosh and Lustgarten 2006; Chen, Chang, and Lee 2008), this study partitions total samples into three categories: large, medium, and small firms. Given the existence of life cycles in the audit firms, this study further examines whether financial performance differs among the life cycles of the three subsample audit firms and whether financial performance differs among the three subsample audit firms at the same life cycle. Following Smith, Mitchell, and Summer (1985), and Anthony and Ramesh (1992), this study employs total revenues to subdivide the life cycle of audit firms into three stages, including young, adult, and old stages. Based on a 16-year auditing industry data set, empirical results validate that organizational life cycle exists in the audit firms. Next, for audit firms in the same market segment, financial performance differs between life cycle stages. Further, financial performance differs between different subsample firms at the same life cycle stage. …

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