The Hiring of Accounting and Finance Officers from Audit Firms: How Did the Market React?
Marshall A. Geiger
University of Richmond - E. Claiborne Robins School of Business - Economics
Clive S. Lennox
Nanyang Technological University
David S. North
University of Richmond - E. Claiborne Robins School of Business
Review of Accounting Studies, Vol. 13, 2008
This study investigates the market’s reaction to companies hiring accounting and finance officers directly from their external audit firms - the auditor to - client hiring practice referred to as the ‘‘revolving door.’’ The Sarbanes-Oxley Act (SOX) eliminated this hiring practice, reflecting concerns that such appointments may impair audit and financial reporting quality. However, it was also argued that companies may have benefited from hiring individuals already familiar with their systems, organization and personnel. To determine the prevalence of this hiring practice and how shareholders viewed these appointments, we examine 3-day cumulative abnormal returns around the announcements of newly appointed accounting and finance officers over the period 1985-2002. We find that the proportion of revolving door hires is relatively low (only 6.1% of all hires in our sample), but that when they did occur the market valued the revolving door appointments more positively than other appointments. Further tests reveal that the positive market reaction to revolving door appointments is driven mainly by smaller companies, and that these appointments are not associated with lower financial reporting quality when assessing subsequent discretionary accruals or the receipt of an Accounting and Auditing Enforcement Release (AAER). Overall, the low frequency of occurrence, investors’ positive perceptions, and the lack of association with deteriorated reporting quality indicate that the SOX restriction on revolving door appointments may have been unnecessary and will do little to protect shareholders.
Keywords: Revolving door, Event study, Audit and reporting quality
JEL Classification: G38, M42Accepted Paper Series
Date posted: August 27, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.359 seconds