The Hiring of Accounting and Finance Officers from Audit Firms: How Did the Market React?

Posted: 27 Aug 2011

See all articles by Marshall A. Geiger

Marshall A. Geiger

University of Richmond

Clive S. Lennox

University of Southern California

David S. North

University of Richmond - E. Claiborne Robins School of Business

Date Written: 2008

Abstract

This study investigates the market’s reaction to companies hiring accounting and finance officers directly from their external audit firms - the auditor to - client hiring practice referred to as the ‘‘revolving door.’’ The Sarbanes-Oxley Act (SOX) eliminated this hiring practice, reflecting concerns that such appointments may impair audit and financial reporting quality. However, it was also argued that companies may have benefited from hiring individuals already familiar with their systems, organization and personnel. To determine the prevalence of this hiring practice and how shareholders viewed these appointments, we examine 3-day cumulative abnormal returns around the announcements of newly appointed accounting and finance officers over the period 1985-2002. We find that the proportion of revolving door hires is relatively low (only 6.1% of all hires in our sample), but that when they did occur the market valued the revolving door appointments more positively than other appointments. Further tests reveal that the positive market reaction to revolving door appointments is driven mainly by smaller companies, and that these appointments are not associated with lower financial reporting quality when assessing subsequent discretionary accruals or the receipt of an Accounting and Auditing Enforcement Release (AAER). Overall, the low frequency of occurrence, investors’ positive perceptions, and the lack of association with deteriorated reporting quality indicate that the SOX restriction on revolving door appointments may have been unnecessary and will do little to protect shareholders.

Keywords: Revolving door, Event study, Audit and reporting quality

JEL Classification: G38, M42

Suggested Citation

Geiger, Marshall A. and Lennox, Clive and North, David S., The Hiring of Accounting and Finance Officers from Audit Firms: How Did the Market React? (2008). Review of Accounting Studies, Vol. 13, 2008, Available at SSRN: https://ssrn.com/abstract=1917895

Marshall A. Geiger

University of Richmond ( email )

28 Westhampton Way
Richmond, VA 23173
United States
804-287-1923 (Phone)

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

David S. North

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States

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