Does Tax Avoidance Enhance Firm Value? The Impact of Audit Firm Tenure

• In Event: Auditor Tenure and Mandatory Auditor Rotation

Abstract

Regulators express concerns on the negative impact of extended auditor-client relationship on the monitoring role of external auditors. We propose that tax avoidance should increase firm value if extended audit firm tenure facilitates managers to advance shareholder wealth. Conversely, extended audit firm tenure should decrease the positive relation between tax avoidance and firm value, if extended audit firm tenure exacerbates managers’ opportunistic behavior for rent extraction. We not only find that tax avoidance increases as audit firm tenure lengthens, but also find that the negative relation between tax avoidance and firm value attenuates as audit firm tenure increases. This indicates that long tenure increases external auditor’s governance role. Additional analyses reveal that audit firm tenure further enhances other external governance mechanism’s positive impact on the relation between tax avoidance and firm value. Our results imply that mandatory audit firm rotation may negatively affect external auditor’s monitoring role.

Authors

• Li Zheng Brooks, Washington State University

• Agnes C. S. Cheng, Louisiana State University

• Pei-Yu Sun, Louisiana State University