Selection Bias in Audit Firm Tenure Research
64 Pages Posted: 3 Dec 2018 Last revised: 5 Jun 2023
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Selection Bias in Audit Firm Tenure Research
Selection Bias in Audit Firm Tenure Research
Date Written: March 15, 2023
Abstract
This study examines selection bias in audit firm tenure research. We first illustrate conceptually, in the presence of selection bias, how conventional pooled cross-sectional tests can lead researchers to spuriously estimate a causal effect of tenure on audit quality when none exists. We then empirically demonstrate the existence of selection bias: longer versus shorter duration client-auditor pairs differ systematically in a variety of ways that also relate to measures of audit quality, and these differences exist at the outset of relationships. Finally, we re-examine models of audit quality and tenure after including client-audit firm relationship fixed effects. These relationship fixed effects mitigate selection bias by moving the level of analysis from between clients (cross-sectional) to within client-auditor pairs (longitudinal). Our longitudinal analysis shows no evidence that audit quality changes with tenure over time within client-audit firm relationships. Overall, the combined evidence suggests that the previously documented association between audit firm tenure and audit quality is likely attributable to selection bias and cannot be taken as evidence of a causal link.
Keywords: Auditor Tenure, Audit Quality, Selection Bias, Fixed Effects
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