Does Mandatory Audit Firm Rotation Improve or Impair Corporate Investment Efficiency?

44 Pages Posted: 26 Apr 2010  

Tong Lu

University of Houston

Shiva Sivaramakrishnan

Rice University

Date Written: April 20, 2010

Abstract

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

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

Tong Lu (Contact Author)

University of Houston ( email )

Houston, TX 77204
United States

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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