44 Pages Posted: 26 Apr 2010
Date Written: 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.
Keywords: Information Role of Auditing, Insurance Role of Auditing, Auditor Conservatism, Auditor Independence
JEL Classification: M42, M48
Suggested Citation: Suggested Citation
Lu, Tong and Sivaramakrishnan, Shiva, Does Mandatory Audit Firm Rotation Improve or Impair Corporate Investment Efficiency? (April 20, 2010). Available at SSRN: https://ssrn.com/abstract=1594951 or http://dx.doi.org/10.2139/ssrn.1594951
By Ross Fuerman