Does industry specialization and diversification affect audit office growth?

Abstract

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] This study examines the determinants of audit office growth, and focuses on strategic client portfolio decisions made by offices. While auditors are clearly motivated to grow, prior studies have examined the consequences of that growth rather than the determinants. I find that a diversified client portfolio is associated with higher office growth, holding other city and office characteristics constant. Additional analysis suggest the growth is stemming from higher industry-specific growth in the industries of specialization. Therefore, the diversified strategy hinges on gaining a certain level of specialization in the industries served by the office. I show the effect of diversification on office growth is more pronounced in diversified and volatile cities, while the effect of specialization on industry-specific growth is more pronounced in regulated industries, but attenuated in innovative industries.