Is Auditor Independence Endogenous? Evidence Against Common Governance Indices and Sarbanes-Oxley Prescriptions

Abstract:     
This paper examines whether firms jointly choose auditor-independence with alternative inputs to governance production. We find that auditor-independence is correlated with a number of alternative governance-producing mechanisms, and show that these results are unlikely to be artifacts of omitted variable bias. These findings (i) suggest that firm responses will tend to offset the intended governance enhancing consequences of any regulation that formally proscribes the level of an input to corporate governance production, such as the auditor independence provision of the Sarbanes-Oxley Act, and (ii) highlight how simple-sum indices of corporate governance can exhibit considerable bias.

Number of Pages in PDF File: 24

Keywords: Corporate Governance, Auditor Independence, Sarbanes-Oxley Act of 2002, Governance Indices

JEL Classification: G30, G38, M42

working papers series