Audit Partner Tenure and Cost of Equity Capital

Azizkhani, Masoud; Monroe, Gary S.; Shailer, Greg

doi:10.2308/ajpt-50308

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other| February 01 2013

Audit Partner Tenure and Cost of Equity Capital

Masoud Azizkhani;

Masoud Azizkhani

Masoud Azizkhani is a Lecturer at The Australian National University and an Assistant Professor at Ilam University, Gary S. Monroe is a Professor at The University of New South Wales, and Greg Shailer is an Associate Professor at The Australian National University.

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Gary S. Monroe;

Gary S. Monroe

Masoud Azizkhani is a Lecturer at The Australian National University and an Assistant Professor at Ilam University, Gary S. Monroe is a Professor at The University of New South Wales, and Greg Shailer is an Associate Professor at The Australian National University.

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Greg Shailer

Masoud Azizkhani is a Lecturer at The Australian National University and an Assistant Professor at Ilam University, Gary S. Monroe is a Professor at The University of New South Wales, and Greg Shailer is an Associate Professor at The Australian National University.

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Author & Article Information

We are grateful to the anonymous referees and Robert Knechel for their constructive feedback on various versions of this paper. We also thank Jean Bedard, Jeff Cohen, Neil Fargher, Dominic Gasbarro, Michael Martin, Ted Mock, Terry O'Neil, Renee Radich, Roger Simnett, Philip Sinnadurai, Tom Smith, Stephen Taylor, Seng Teh, Farshid Vahid, Mark Wilson, Sue Wright, the participants at the 2007 AAA Midyear Audit Conference, the 2007 International Symposium on Audit Research, the 2007 Accounting and Finance Association of Australia and New Zealand Annual Conference, the 2006 Australian National Center for Audit and Assurance Research Symposium at Australian National University, and seminar participants at The University of New South Wales and Macquarie University for their useful comments on earlier drafts. We thank Elizabeth Carson at The University of New South Wales for her generous sharing of auditor opinions data.

Editor's note: Accepted by W. Robert Knechel.

Online ISSN: 1558-7991

Print ISSN: 0278-0380

2013

AUDITING: A Journal of Practice & Theory (2013) 32 (1): 183–202.

https://doi.org/10.2308/ajpt-50308

SUMMARY

We examine whether audit engagement partner tenure and rotation affect investors' perceptions, as proxied by the ex ante cost of equity capital. We find that partner tenure has a nonlinear relation with the ex ante cost of equity capital for non-Big 4 audit engagements prior to the introduction of partner rotation requirements, and that the imputed gains from partner tenure appear similar to the imputed gains of having a Big 4 auditor. Consistent with the tenure results, we also find that partner rotation is associated with increased ex ante cost of equity capital. Our results are very robust to a variety of sensitivity tests and raise important questions for future research. It is not known to what extent investors or analysts are aware of the audit partner's identity or pay attention to audit partner tenure; if investors or analysts do not consider partner tenure, future research may identify omitted variables that have the same nonlinear relationship with the ex ante cost of capital that we observe for non-Big 4 audit partner tenure.

JEL Classifications: M42; M48.

Data Availability: The data used are from public sources identified in the manuscript.

2013

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