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Ownership Concentration in Western European Firms: The Role of Mandatory Auditor Rotation
Omrane Guedhami, Memorial University of Newfoundland
Jeffrey A Pittman, Hong Kong University of Science & Technology
ABSTRACT. Prior research implies that high-quality financial reporting plays a natural role in helping minority investors identify any diversion of corporate resources by controlling shareholders. In cross-country research, we examine whether imposing mandatory audit-firm or audit-partner rotation explains ownership concentration, our proxy for the agency conflict between minority and controlling shareholders. We provide strong, robust evidence that ownership concentration in Western European public companies is lower under both mandatory audit-firm and audit-partner rotation, consistent with investors perceiving that these regulations improve accounting transparency. In fact, our results suggest that these two forms of mandatory auditor rotation have an almost identical economic impact on reducing information asymmetry. This research has important policy implications given that many countries, including the U.S., continue to debate whether to require some form of auditor rotation.
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