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 12, 2016

Contemporary Accounting Research, Forthcoming

Abstract:     
This study examines whether the term of the auditor-client relationship (i.e., auditor tenure) is associated with future stock price crash risk measured both ex ante and ex post. Using a large sample of U.S. public firms with Big Four auditors, we find robust evidence that auditor tenure is negatively related to one-year-ahead stock price crash risk. The evidence is consistent with monitoring-by-learning where development of client-specific knowledge over the term of the auditor-client relationship enhances auditors’ ability to detect and deter bad news hoarding activities by clients, thereby reducing future crash risk. This result holds even after controlling for endogeneity of the tenure/crash risk relation. We further provide evidence indicating that option market investors do not fully incorporate the information contained in the term of auditor-client relationship in predicting future stock price crash risk. Our empirical results have important policy implications for regulators concerned with ensuring auditor independence.

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

JEL Classification: G12, G34, M42


Not Available For Download

Date posted: February 6, 2012 ; Last revised: January 20, 2016

Suggested Citation

Callen, Jeffrey L. and Fang, Xiaohua, Crash Risk and the Auditor-Client Relationship (January 12, 2016). Contemporary Accounting Research, Forthcoming. 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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