The impact of chief audit executive turnover in Taiwan

Abstract

This study adds to the emerging body of research showing the importance of internal audit to improve corporate governance and firm performance. Specifically, we test how the market reacts to the announcement of a turnover to the head of internal audit (i.e., the chief audit executive (CAE)). We find negative cumulative abnormal returns in the days surrounding the announcement of a CAE turnover and that the market holds a relatively negative perception of CAE turnover regardless of the reasons for the turnover event. We then study two reasons for why the market would react negatively to the CAE turnover and find that CAE turnovers are associated with lower financial reporting quality (i.e., greater likelihood of misstatements, higher abnormal and positive discretionary accruals) and lower operating performance (i.e., return on assets, return on equity, and Tobin’s Q). We find evidence of both decreased financial reporting quality and firm performance following CAE turnovers. The financial reporting changes are largely temporary, only having an influence for one period after the turnover event. The firm performance effects are also temporary, but last for 2 to 5 years after the CAE turnover. Finally, in additional analyses we also find that CAE turnover is positively associated with external audit fees.