Auditor Tenure, Information Asymmetry and Earnings Quality

54 Pages Posted: 30 Mar 2017

See all articles by Sidney Leung

Sidney Leung

City University of Hong Kong (CityUHK) - Department of Accountancy

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Lingmin Xie

Shenzhen University - College of Economics

Date Written: March 10, 2017

Abstract

We confirm the results of prior studies that auditor tenure improves earnings quality on average. We extend their findings to show that the improvement in earnings quality resulting from longer auditor tenure is greater for firms with higher information asymmetry, after controlling for auditor’s industry specialization. We argue that audits of client firms with higher information asymmetry demand more client specific knowledge that cannot be gleaned from industry or general experience. Longer tenure helps auditors acquire such knowledge and therefore, the benefit of longer audit tenure is greater in firms with greater information asymmetry. We use bid-ask spread, return volatility, intensity of R&D expenditure and a composite distance measure to measure information asymmetry. Our results imply that frequent auditor changes are costlier for firms with higher information asymmetry. At the policy level, our results imply that mandatory auditor rotation is more (less) costly for firms with high (low) information asymmetry.

Keywords: Information Asymmetry, Auditor Rotation, Client-Specific Knowledge, Earnings Quality

JEL Classification: M42, M41

Suggested Citation

Leung, Sidney and Srinidhi, Bin and Xie, Lingmin, Auditor Tenure, Information Asymmetry and Earnings Quality (March 10, 2017). Available at SSRN: https://ssrn.com/abstract=2941949 or http://dx.doi.org/10.2139/ssrn.2941949

Sidney Leung (Contact Author)

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788-7924 (Phone)
+852 2788-7944 (Fax)

Bin Srinidhi

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Lingmin Xie

Shenzhen University - College of Economics ( email )

5th Floor, Wenke Building
3688 Nanhai Road
Shenzhen, Guangdong 518060
China

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