Auditor rotation behavior in Germany

The German legislator implements, among other auditor regulations, mandatory auditor rotation in order to contribute to the European objectives of higher auditor independence and audit market deconcentration. However, it is questionable how German firms will implement the mandatory auditor rotation within the statutory transition periods. Here, reputation and transaction cost theory are contrary in describing how firms will handle the mandatory auditor rotation. This paper examines the firms’ behavior in dealing with mandatory auditor rotation for the 120 largest German firms which are listed in the German index HDAX. On the one hand, a transaction cost-based rotation behavior suggests a late auditor rotation within the transition periods. On the other hand, the reputation hypothesis argues for an early auditor rotation within the transition periods caused by reputational considerations of the audit committee. In order to obtain evidence on auditor rotation behavior during the transition periods this paper contributes to the existing body of literature by analyzing auditor rotation behavior of the HDAX firms for the period 2005 to 2022 and gives evidence for transaction cost theory. This result is contrary to the existing body of literature in favor of the reputation hypothesis.