The Effect of Mandatory Audit Firm Rotation on Firm Value: Evidence from Korea

ABSTRACT This study examines the impact of a mandatory audit firm rotation policy on client firm value from the investors’ perspective. This study is conducted in Korea, where this policy was implemented from 2006 to 2010. Firm value is measured as Tobin’s q in the stock market for the years 2000 to 2013. The study analyzes firm valuation in relation to continuing engagement, voluntary audit firm rotation, and mandatory audit firm rotation during the pre-regulation (2000–2005), regulation (2006–2010), and post-regulation (2011–2013) periods. The findings reveal that investors reacted negatively to client firms being subjected to mandatory audit firm rotation and responded positively once mandatory audit firm rotation was removed. Overall, the results suggest that investors in the financial market are not supportive of mandatory audit firm rotation. Data Availability: All data are available from the public database identified in the paper. JEL Classifications: M42.