Abstract

http://ssrn.com/abstract=2000290
 


 



Crash Risk and the Auditor-Client Relationship


Jeffrey L. Callen


University of Toronto - Rotman School of Management

Xiaohua Fang


Georgia State University - J. Mack Robinson College of Business

January 18, 2012


Abstract:     
This study examines whether the term of the auditor-client relationship (i.e., auditor tenure) is associated with future stock price crash risk. Using a large sample of U.S. public firms from the years 1980 to 2008, we find robust evidence that auditor tenure is negatively related to one-year ahead stock price crash risk. This evidence is consistent with monitoring by learning perspective, namely, that the development of client-specific knowledge over the term of the auditor-client relationship effectively enhances auditors’ ability to detect and deter bad news hoarding activities by clients, thereby reducing future stock price crash risk. Additional analysis shows that the negative relation is moderated for firms audited by industry specialist and for firms during the post-SOX (Sarbanes-Oxley Act) period. We also present additional evidence that when the term of the auditor-client relationship is excessively long, the cognitive-incentive effect dominates the effect of monitoring by learning. Our evidence has important policy implications for regulators in ensuring the functioning of independent auditors in capital markets.

Keywords: crash risk, external monitoring, auditor-client relationship

JEL Classification: G32, G34, M42

working papers series





Not Available For Download

Date posted: February 6, 2012 ; Last revised: February 8, 2012

Suggested Citation

Callen, Jeffrey L. and Fang, Xiaohua, Crash Risk and the Auditor-Client Relationship (January 18, 2012). Available at SSRN: http://ssrn.com/abstract=2000290

Contact Information

Jeffrey L. Callen
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)
Xiaohua Fang (Contact Author)
Georgia State University - J. Mack Robinson College of Business ( email )
P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7235 (Phone)
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