SSRN-Audit Firm Tenure and the Equity Risk Premium by Jeff Boone, Inder Khurana, K. Raman

While accounting based, it had financial ramifications and deals more with governance, so I going to mention this here. I am working on a paper about auditors and in some background reading just stumbled upon this paper by Boone, Khurana, and Raman. Quite interesting. The abstract does a wonderful job catching the essence of the paper:

SSRN-Audit Firm Tenure and the Equity Risk Premium by Jeff Boone, Inder Khurana, K. Raman:

"....Based on prior research, whereas the “auditor learning” argument predicts that audit quality will change in only one direction (i.e., improve) with tenure, the “auditor-client closeness” argument suggests that audit quality may decrease beyond some (albeit unspecified) length of tenure due to impaired auditor independence and objectivity.....we find that the equity risk premium decreases in the early years of tenure but increases with additional years of tenure. These findings persist after we control for well-known risk factors and company characteristics that have been shown in prior research to be related to the cost of equity capital"

Which will definitely make it into the section of my Corporate Finance classes on governance.


Cite:
Boone, Jeff P., Khurana, Inder K. and Raman, K. K.,Audit Firm Tenure and the Equity Risk Premium. Journal of Accounting Auditing and Finance, Forthcoming
Available at SSRN: http://ssrn.com/abstract=940401