Cost Function Estimation Before and After Regulatory Reform: Evidence from Korea’s CPA Service Industry

Ryu, Sang-Lyul ; Sawng, Yeong-wha ; Won, Jayoun


This paper aims to examine how the cost structure of certified public accountant firms changed after the accounting reform of 2005. Korea enacted various accounting reform acts adopting Sarbanes-Oxley Act in 2005. Our sample comprises 1,230 firm-year observations from 1997 to 2012. The sample period is decomposed into two sub-periods: pre-reform (1997–2004) and post-reform (2005–2012) periods. We estimate a multi-product translog cost function to determine whether there are significant changes in the economies of scale during the pre- and post- reform periods. The estimated cost function suggests that overall and product-specific economies of scale prevailed during the full sample, pre- and post-reform periods. However, overall economies of scale lessened after the accounting reform and the economies of scale seemed to be depleted for the larger firms during the full and post-reform periods. As for product-specific scale economies after the reform, the marginal costs of producing Audit and Accounting increased, whereas those of producing Tax services declined. The economies of scale in business advisory services remained constant before and after the accounting reform. The results gleaned from this study may provide CPA firms with managerial implications regarding the changes in cost structure after the accounting reform.


Accounting Reform; Cost Function; CPA Firm; Economies of Scale

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