Does Board Independence Substitute for External Audit Quality? Evidence from an Exogenous Regulatory Shock

27 Pages Posted: 28 Apr 2017

See all articles by Pandej Chintrakarn

Pandej Chintrakarn

Mahidol University International College (MUIC)

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Shenghui Tong

Central University of Finance and Economics (CUFE)

Date Written: April 28, 2017

Abstract

Exploiting the passage of the Sarbanes-Oxley Act (SOX) as an exogenous regulatory shock, we investigate whether board independence substitutes for external audit quality. Based on over 14,000 observation across 18 years, our difference-in-difference estimates show that firms forced to raise board independence are far less likely to employ a Big4 auditor. In particular, board independence lowers the propensity to use a Big4 auditor by about 38%. Firms with stronger board independence enjoy more effective governance and therefore do not need as much external audit quality as those with less effective governance do. Based on a natural experiment, our empirical strategy is far less vulnerable to endogeneity and is thus much more likely to show a causal effect, rather than merely an association.

Keywords: auditor, independent directors, board independence, corporate governance, Sarbanes-Oxley, exogenous shock, natural experiment

JEL Classification: M41, M42, G34

Suggested Citation

Chintrakarn, Pandej and Treepongkaruna, Sirimon and Jiraporn, Pornsit and Tong, Shenghui, Does Board Independence Substitute for External Audit Quality? Evidence from an Exogenous Regulatory Shock (April 28, 2017). Available at SSRN: https://ssrn.com/abstract=2960266 or http://dx.doi.org/10.2139/ssrn.2960266

Pandej Chintrakarn

Mahidol University International College (MUIC) ( email )

999 Buddhamonthon 4 Road
Salaya, Nakhonpathom, 73170
Thailand

Sirimon Treepongkaruna

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+61864887853 (Phone)
+61864881086 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Shenghui Tong

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
193
Abstract Views
1,210
rank
163,080
PlumX Metrics