Aaron D. Crabtree

The Impact of Auditor Tenure on Initial Bond Ratings

Abstract The desirability of mandated auditor rotation represents an ongoing debate in the accounting profession. Proponents assert that audit quality (through auditor independence) is threatened by extended auditor–client relationships. Opponents assert that mandatory auditor rotation will actually decrease audit quality, primarily due to the time required for auditors to learn the nuances of a clients business processes. Our research contributes to this important debate by providing empirical evidence regarding the capital markets effects of audit tenure. Specifically, we examine newly issued bonds over the period 1990–2002 and find auditor tenure to be positively related to ratings received. This finding remains consistent across all sample issues regardless of investment grade, firm performance, or time period. We find no evidence that extended auditor–client relationships result in a decrease in the perceptions of audit quality.

Earnings Announcement Timing and Analyst Following

Using a large sample of firms in the post–Regulation Fair Disclosure (Reg FD) era, we examine the cross-sectional association between earnings announcement timing and analyst following that precedes it—that is, potential competing information. We fail to find a positive association between earnings announcement delay and preceding analyst following, as would be expected if the two were substitutes. Our findings of a negative association suggest that firms with large analyst following tend to announce annual earnings earlier than others. Furthermore, when we investigate the tendency of analysts to follow firms, a negative association exists in the regression of analyst following on prior earnings announcement delay, suggesting that analysts are more likely to follow firms that report earnings early. Collectively, managers’ earnings announcement timing and analyst following are not a substitutive relation, but rather a complementary one.

The Influence of Institutional Investment on Tax Aggressiveness

This study investigates the association between tax reporting aggressiveness and types of institutional ownership. We find firms with higher levels of transient institutional owners are more likely to engage in aggressive tax planning leading to permanent and temporary differences. These results are robust to Granger causality tests and to a lesser degree changes specification. We find firms with more quasi-indexer ownership are less likely to engage in tax planning leading to permanent differences, but these results are sensitive to invariant time series characteristics of the tax measures. We find an association, albeit weak, between firms with dedicated institutional ownership and temporary differences. We also examine cash taxes paid over the past five years and find firms with higher levels of institutional investors are statistically more likely to own firms with lower cash effective tax rates. This holds regardless of heterogeneity in institutional ownership, however the economic significance is greatest for the transient group.