Stephanie J. Rasmussen

Audit Quality, Alternative Monitoring Mechanisms, and Cost of Capital: An Empirical Analysis

Prior studies document that firms using a Big 4 auditor have a lower cost of capital than other firms. We extend this literature by examining whether using an industry specialist auditor reduces cost of capital for clients of Big 4 audit firms. We document that firms that use Big 4 auditors that are industry specialists have significantly lower cost of both equity and debt than firms that use non-specialist Big 4 auditors. We further investigate whether the benefits of using an industry specialist auditor vary with the strength of alternative monitoring mechanisms. We show that using an industry specialist auditor is especially important when alternative monitoring mechanisms, such as boards of directors or institutional shareholders, are relatively weak. In other words, the benefits of using an industry specialist auditor dissipate when alternative monitoring mechanisms are strong. This evidence suggests some degree of substitutability between audit quality and alternative monitoring mechanisms.

When Do Ineffective Audit Committee Members Experience Turnover

We use information extracted from a major proxy advisory service to test predictions from institutional theory regarding when and why audit committee (AC) members experience turnover because of evidence of ineffective governance. First, we broadly categorize AC ineffectiveness concerns as either (i) financial reporting failures or (ii) characteristics of individual AC members. Institutional theory suggests that the visible nature of the first category is more likely to threaten perceptions of AC legitimacy and hence prompt turnover, which is what we find. We then enrich the analysis by interacting the AC-member ineffectiveness indicators with the extent of shareholder protest votes, finding that shareholder dissent elevates the turnover effects of both categories of ineffectiveness, as institutional theory would predict. Finally, we find that otherwise effective AC members face an increased likelihood of turnover if they serve on the AC when financial reporting failures are discovered, even if they were not on the AC when the events precipitating the failures occurred. Overall, our findings support the institutional theoretic premise that boards take remedial actions when necessary to restore perceived legitimacy.

Cooperating with Regulators: Meaningful Credit or Sword of Damocles?

Regulators claim to reward firm cooperation in the enforcement process. However, critics question which actions constitute firm cooperation and contend that cooperation leads to “harsh�? and “unfair�? outcomes. Examining 1,162 enforcement actions for financial misrepresentation initiated by the Securities and Exchange Commission and Department of Justice, we find that regulator-cited cooperation credit is best explained by remedial actions and self-reported law violations. Cooperation credit is negatively associated with firm monetary penalties assessed by regulators. Our estimates suggest that firms with cooperation credit realize an average penalty reduction of

How Costly is the Sarbanes Oxley Act? Evidence on the Effects of the Act on Corporate Profitability

23.8 million (49 percent). We also estimate that average reputation-related losses are

Short Interest as a Signal of Audit Risk

756 million (70 percent) lower for firms with cooperation credit. We find no association between cooperation credit and related private action outcomes. Our results provide important insight into what constitutes meaningful cooperation with regulators and suggest that the benefits can be substantial for firms deemed to be cooperative.