Auditor Quality Attributes, the Comparability of Financial Statements and Investment Efficiency

Abstract

The aim of this paper is twofold: to investigate the impact of audit quality attributes, namely audit firm tenure and auditor partner experience on firm-level comparability, which was developed by De Franco et al. (2011), and to analyze the economic consequences of comparability by examining its effect on investment efficiency. After analyzing these aspects of Taiwanese publicly traded firms throughout 2005 to 2011, the empirical evidence shows that comparability increases with the level of audit firm tenure and audit partner experience. Furthermore, for short and middle tenure engagements, this paper finds that audit partner experiences are positively related to the level of comparability. Alternatively, the long tenure results indicate an insignificant relation between audit partner experience and the level of comparability. Finally, this paper provides evidence that documents a conditional positive association between the level of comparability and investment for firms operating in settings more prone to underinvestment. After decomposing total investments into two components, namely capital and non-capital expenditures, this paper finds that a higher level of comparability can mitigate investment inefficiency, including both under- and overinvestment in capital expenditures; however, it has no effect on investment inefficiency in non-capital expenditures.