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Audit tenure and the equity risk premium: evidence from Jordan

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  • Rana Ahmad Baker
  • Ali Al-Thuneibat

Abstract

Purpose - The purpose of this paper is to investigate the relation between audit firm tenure and the perceived audit quality measured by the client-specific equity risk premium. The study population consists of all the manufacturing and service firms traded in Amman Bourse during the period 2002-2005. Design/methodology/approach - The Boone Findings - The results show that the relation between audit firm tenure and equity risk premium is positive, the equity risk premium increases with tenure as a result of reduced audit quality. These results were consistent with some previous studies, which showed that long relationships between an audit firm and a client are associated with lower perceived audit quality and, as a result, higher equity risk premium. Practical implications - The audit firm should be rotated in order to enhance auditor independence and audit quality, and increase investors' confidence in reported earnings. Additionally, investors are encouraged to give higher attention to the tenure of the audit firm when evaluating the quality of the financial reports of the companies they are planning to invest in. Originality/value - This is the first paper to provide evidence from a developing country about an important issue – audit quality – which is expected to support and sustain improvement of audit quality, and therefore, financial reporting quality.

Suggested Citation

  • Rana Ahmad Baker & Ali Al-Thuneibat, 2011. "Audit tenure and the equity risk premium: evidence from Jordan," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 19(1), pages 5-23, March.
  • Handle: RePEc:eme:ijaipp:v:19:y:2011:i:1:p:5-23
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    References listed on IDEAS

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    1. Fen-May Liou & Chien-Hui Yang, 2008. "Predicting business failure under the existence of fraudulent financial reporting," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 16(1), pages 74-86, June.
    2. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, September.
    3. DeFond, Mark L. & Subramanyam, K. R., 1998. "Auditor changes and discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 35-67, February.
    4. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
    5. Arrunada, Benito & Paz-Ares, Candido, 1997. "Mandatory rotation of company auditors: A critical examination," International Review of Law and Economics, Elsevier, vol. 17(1), pages 31-61, March.
    6. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    7. Charles Piot & Remi Janin, 2007. "External Auditors, Audit Committees and Earnings Management in France," European Accounting Review, Taylor & Francis Journals, vol. 16(2), pages 429-454.
    8. H. Young Baek & Dong-Kyoon Kim & Joung W. Kim, 2008. "Management earnings forecasts and adverse selection cost: good vs bad news forecast," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 16(1), pages 62-73, June.
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    Cited by:

    1. Mohsen Souissi & Hichem Khlif, 2012. "Meta-analytic review of disclosure level and cost of equity capital," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 20(1), pages 49-62, February.

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