Auditor Tenure and Perceptions of Audit Quality
Al (Aloke) Ghosh
City University of New York (CUNY) - Baruch College
SUNY at Old Westbury - School of Business
Office of Economic Analysis, The Securities and Exchange Commission Working Paper
We analyze how investors and information intermediaries perceive auditor tenure. Using earnings response coefficients from returns-earnings regressions as a proxy for investor perceptions of earnings quality, we document a positive association between investor perceptions of earnings quality and tenure. Further, we find that the influence of reported earnings on stock rankings becomes larger with extended tenure, although the association between debt ratings and reported earnings does not vary with tenure. Finally, we find that the influence of past earnings on one-year-ahead earnings forecasts becomes larger as tenure increases. In general, our results are consistent with the hypothesis that investors and information intermediaries perceive auditor tenure as improving audit quality. One implication of our study is that imposing mandatory limits on the duration of the auditor-client relationship might impose unintended costs on capital market participants.
Number of Pages in PDF File: 44
Keywords: auditor tenure, earnings quality, auditor independence
JEL Classification: M41, M43, M49
Date posted: April 17, 2003
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