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Investor perceptions of the earnings quality consequences of hiring an affiliated auditor

Author

Listed:
  • William R. Baber

    (Georgetown University)

  • Jagan Krishnan

    (Temple University)

  • Yinqi Zhang

    (American University)

Abstract

The Sarbanes–Oxley Act (SOX) requires that firms wait 1 year before hiring an individual employed as a member of the external audit team. SOX’s intent is to reduce the perceived loss of auditor independence due to affiliated hiring. SOX also requires fully independent audit committees and disclosure of directors with financial expertise. Using a sample of financial executive hires during the pre-SOX period, we find that earnings response coefficients (ERCs) decline following hires of individuals recently employed by the firm’s external auditor, but ERCs do not decline following hires not recently employed by the external auditor. We also find smaller ERC declines following affiliated hires for firms with audit committee compositions consistent with subsequently imposed SOX requirements. Further investigation using measures of earnings quality suggests that differences in ERC changes are attributable to perceived, rather than real, changes in earnings quality following affiliated hires.

Suggested Citation

  • William R. Baber & Jagan Krishnan & Yinqi Zhang, 2014. "Investor perceptions of the earnings quality consequences of hiring an affiliated auditor," Review of Accounting Studies, Springer, vol. 19(1), pages 69-102, March.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:1:d:10.1007_s11142-013-9244-9
    DOI: 10.1007/s11142-013-9244-9
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    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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