Auditor Independence and the Quality of Information in Financial Disclosures: Evidence for Market Discipline versus Sarbanes--Oxley Proscriptions

James Brown (), Dino Falaschetti and Michael Orlando ()

American Law and Economics Review, 2009, vol. 12, issue 1, 39-68

Abstract: Does auditor independence increase the quality of financial disclosures, and is regulation necessary to realize such improvements? Conventional wisdom answers "yes!," but lacks support from scholarly studies. We thus investigate whether auditor independence affects earnings quality in ways that prior research would have missed, and consider the efficiency-consequences of regulation that restricts auditors from producing non-audit services (NAS). Results from our research design offer stronger evidence that auditor independence increases earnings quality. Importantly, however, they offer little evidence that a client-firm's choice of auditor independence creates externalities, and thus speak more directly against the recent Sarbanes--Oxley restriction on NAS. Copyright 2009, Oxford University Press.

Date: 2009
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