Selection Bias in Audit Firm Tenure Research

64 Pages Posted: 3 Dec 2018 Last revised: 5 Jun 2023

See all articles by Ying Zhou

Ying Zhou

University of Connecticut

David P. Weber

University of Connecticut - Department of Accounting

Ce Wen

University of Connecticut - Department of Accounting

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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

Suggested Citation

Zhou, Ying and Weber, David P. and Wen, Ce, Selection Bias in Audit Firm Tenure Research (March 15, 2023). University of Connecticut School of Business Research Paper No. 22-14, Available at SSRN: https://ssrn.com/abstract=3288034 or http://dx.doi.org/10.2139/ssrn.3288034

Ying Zhou (Contact Author)

University of Connecticut ( email )

2100 hillside road
Storrs, CT 06084
United States
3528708674 (Phone)

David P. Weber

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Ce Wen

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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