American Law and Economics Review Advance Access published online on October 26, 2009
American Law and Economics Review, doi:10.1093/aler/ahp014
Auditor Independence and the Quality of Information in Financial Disclosures: Evidence for Market Discipline versus Sarbanes–Oxley Proscriptions
Iowa State University,
Florida State University and Hoover Institution, Stanford University
Tulane University
Send correspondence to: Dino Falaschetti, Associate Professor of Law and Economics, College of Law, Florida State University, Tallahassee, FL 32306-1601, USA; Telephone: 850-644-4248; E-mail: dfalaschetti{at}law.fsu.edu.
JEL Classification: G14, G38, K22, M42
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Abstract |
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Does auditor independence increase the quality of financial disclosures, and is regulation necessary to realize such improvements? Conventional wisdom answers "yes!," but lacks support from scholarly studies. We thus investigate whether auditor independence affects earnings quality in ways that prior research would have missed, and consider the efficiency-consequences of regulation that restricts auditors from producing non-audit services (NAS). Results from our research design offer stronger evidence that auditor independence increases earnings quality. Importantly, however, they offer little evidence that a client-firm's choice of auditor independence creates externalities, and thus speak more directly against the recent Sarbanes–Oxley restriction on NAS.
We thank, without claiming endorsements from, our referee and editor, Sudipta Basu, Dan Covitz, Ken Euske, Rob Fleck, Jonah Gelbach, Steven Hansen, Andy Hanssen, Jon Klick, Wendy Stock, Chris Stoddard, Mary Sullivan, Doug Young, and seminar participants at the Washington Area Finance Association at George Washington University, Western Economic Association, Conference on Empirical Legal Studies at the NYU School of Law, ISNIE Annual Conference at the University of Toronto, Montana State University's Departments of Accounting and Agricultural Economics and Economics, Santa Clara University's Department of Economics, the Naval Postgraduate School's Graduate School of Business and Public Policy, the FSU College of Law, Cornell Law School, and the University of Texas School of Law for helping us think more carefully about this research.