Target beating and audit firm rotation : Evidence from public companies within the European Union

Prior research presents evidence that audit firm rotation can lead to an initial reduction in audit quality. It can be argued that rotation therefore could create increased opportunities for companies to engage in earnings management for the purpose of beating certain targets. To investigate the relationship between target beating and audit firm rotation we sample public companies in the European Union for the period 2009 to 2023. Our sample size consists of 11,395 observations and 836 audit firm changes. Logistic regression is used to study three different forms of target beating (analyst forecasts, prior year earnings, earnings above zero). Our results find no evidence in support of a positive relationship. This also holds true regardless of which form of target beating that is examined. Instead, our results indicate that there is no relationship between target beating and audit firm rotation. Even though the reason for this outcome is not clear we still discuss some possible explanations towards the final part of this thesis.