Auditor Tenure and Perceptions of Audit Quality

Office of Economic Analysis, The Securities and Exchange Commission Working Paper

44 Pages Posted: 17 Apr 2003  

Al (Aloke) Ghosh

City University of New York (CUNY) - Baruch College

Doocheol Moon

SUNY at Old Westbury - School of Business

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Abstract

We analyze how investors and information intermediaries perceive auditor tenure. Using earnings response coefficients from returns-earnings regressions as a proxy for investor perceptions of earnings quality, we document a positive association between investor perceptions of earnings quality and tenure. Further, we find that the influence of reported earnings on stock rankings becomes larger with extended tenure, although the association between debt ratings and reported earnings does not vary with tenure. Finally, we find that the influence of past earnings on one-year-ahead earnings forecasts becomes larger as tenure increases. In general, our results are consistent with the hypothesis that investors and information intermediaries perceive auditor tenure as improving audit quality. One implication of our study is that imposing mandatory limits on the duration of the auditor-client relationship might impose unintended costs on capital market participants.

Keywords: auditor tenure, earnings quality, auditor independence

JEL Classification: M41, M43, M49

Suggested Citation

Ghosh, Al (Aloke) and Moon, Doocheol, Auditor Tenure and Perceptions of Audit Quality. Office of Economic Analysis, The Securities and Exchange Commission Working Paper. Available at SSRN: https://ssrn.com/abstract=385880 or http://dx.doi.org/10.2139/ssrn.385880

Al (Aloke) Ghosh (Contact Author)

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way
P.O. Box B12-225
New York, NY 10010
United States
646-312-3184 (Phone)
646-312-3161 (Fax)

Doocheol Moon

SUNY at Old Westbury - School of Business ( email )

Old Westbury, NY 11568-0210
United States

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