Does Mandatory Audit Firm Rotation Improve or Impair Corporate Investment Efficiency?
University of Houston
April 20, 2010
We develop a framework with which to analyze the interactions among auditor attestation strategy, corporate investment decision, and capital market valuation. We use this framework to examine mandatory audit firm rotation (Section 207 of the Sarbanes-Oxley Act) and identify its three potential effects: the real (cash flow) effect; the attestation effect; the price effect. In particular, we show that mandatory audit firm rotation impairs corporate investment efficiency for firms with rosy prospects but improves corporate investment efficiency for firms with gloomy prospects.
Number of Pages in PDF File: 44
Keywords: Information Role of Auditing, Insurance Role of Auditing, Auditor Conservatism, Auditor Independence
JEL Classification: M42, M48
Date posted: April 26, 2010