Sidney Leung

Auditor Tenure and Audit Quality: The Role of the Demand for Unique Client Specific Knowledge

Using a sample of US firms from 1988 to 2000, we find a strong positive (weak or no) association between auditor tenure and earnings quality in client firms whose demand for unique client-specific knowledge is higher (lower). These results are consistent with the idea that learning the unique client-specific knowledge is best accomplished by long tenure. Firms requiring higher unique client-specific knowledge are identified in two ways: those with operating characteristics that diverge significantly from industry norms and those with high audit complexity as measured by volatility and audit fees. Our findings are robust to alternative specifications of earnings quality.

Is Concentrated Management Ownership Value Increasing or Decreasing? Evidence in Hong Kong, China During the Asian Financial Crisis

This study evaluates the effects of concentrated management (board director) ownership on changes of firm performance (value and ROA) following the Asian Financial Crisis (1997-98), a shock period when corporate governance structures are of greater concern and strongly tested. Our results show that Hong Kong firms with higher concentrated management ownership had less negative returns (better market performance) and smaller decreases in returns on assets (better accounting performance) during the Crisis. We also find more ownership by non-executive directors is value increasing and no evidence that their proportion improves performance. The results are consistent with the convergence of interests theory between controlling and minority shareholders at concentrated levels of management ownership leading to value increases.

Auditor Tenure, Information Asymmetry and Earnings Quality

We confirm the results of prior studies that auditor tenure improves earnings quality on average. We extend their findings to show that the improvement in earnings quality resulting from longer auditor tenure is greater for firms with higher information asymmetry, after controlling for auditor’s industry specialization. We argue that audits of client firms with higher information asymmetry demand more client specific knowledge that cannot be gleaned from industry or general experience. Longer tenure helps auditors acquire such knowledge and therefore, the benefit of longer audit tenure is greater in firms with greater information asymmetry. We use bid-ask spread, return volatility, intensity of R&D expenditure and a composite distance measure to measure information asymmetry. Our results imply that frequent auditor changes are costlier for firms with higher information asymmetry. At the policy level, our results imply that mandatory auditor rotation is more (less) costly for firms with high (low) information asymmetry.