Auditor Tenure and Stock Price Idiosyncratic Volatility: The Moderating Role of Industry Specialization

In this study, we examine how investors perceive the quality of financial reports audited by auditors with long tenure. We argue that auditor tenure is an important characteristic that influences the effectiveness of audits and thus affects the amount of firm-specific information that is included in...

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Bibliographic Details
Published in:Auditing : a journal of practice and theory 2016-05, Vol.35 (2), p.147-166
Main Authors: Su, Lixin (Nancy), Zhao, Xuezhou (Rachel), Zhou, Gaoguang (Stephen)
Format: Article
Language:English
Subjects:
Accounting firms
Auditors reports
Stock prices
Studies
Tenure
Volatility
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Summary:In this study, we examine how investors perceive the quality of financial reports audited by auditors with long tenure. We argue that auditor tenure is an important characteristic that influences the effectiveness of audits and thus affects the amount of firm-specific information that is included in stock prices by investors. Based on a sample of U.S. firms from 2003 to 2012, we show that longer tenure is associated with higher stock price idiosyncratic volatility. Further analyses reveal that this effect is only present for industry-specialist auditors, suggesting that the effect of tenure on idiosyncratic volatility is contingent on industry expertise. Our results have a number of implications for the financial markets and the accounting and auditing professions.
ISSN:0278-0380
1558-7991
DOI:10.2308/ajpt-51256