Auditor tenure and perceptions of audit quality

Aloke Ghosh, Doocheol Moon

Research output: Contribution to journalArticle

279 Citations (Scopus)

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 greater 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.

Original languageEnglish
Pages (from-to)585-612
Number of pages28
JournalAccounting Review
Volume80
Issue number2
DOIs
Publication statusPublished - 2005 Jan 1

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All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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