Audit firm rotation and firm value: do transition type and non-auditing services matter?

Purpose This study aims to explore how audit firm rotation (AFR) influences firm value, with a particular focus on transition types, namely, switching from Big 4 to non-Big 4 audit firm and non-Big 4 to Big 4 audit firm. In addition, it delves into the moderating effects of nonauditing services (NAS) on the relationship between AFR and firm value. Design/methodology/approach The author used panel data regression models to examine the link between AFR and firm value while adjusting for various factors influencing firm value. This study’s data set encompassed 25,120 Bombay Stock Exchange listed firm-years from 2003 to 2022. The firm value is quantified through Tobin’s Q. Endogeneity issues are addressed through Two-Stage Least Squares and Propensity Score Matching techniques. Findings The findings suggest that embracing AFR generally enhances firm value. Notably, this positive effect is particularly evident when firms transition from Big 4 to non-Big 4 audit firms. Furthermore, contrary to expectations, the incorporation of NAS amplifies the positive impact of AFR on firm value, especially when these services involve tax and financial information system aspects. Originality/value This study is among the pioneering attempts to comprehensively examine the relationship between AFR and firm value by considering the nature of transition and the different types of NAS the auditors offer.