Paper Title
How Does Investor Perceive ‘Fresh Look’ Vs ‘Poor Knowledge’? –Mandatory Audit Firm Rotation From South Korea

Abstract
Although the implementation of mandatory audit firm rotation has been globally reopened, little is known about the relation between mandatory audit firm rotation and the perceptions of investors. The prior studies provide indirect evidences of the effects of audit firm tenure on audit quality/audit quality perception under conflicting arguments. By discussing these conflicting arguments and the current regulatory demand, we examine how investors perceive the implementation of mandatory audit firm rotation in South Korea. Using a direct setting to examine our research question, we analyze the relation between firms with mandatorily switched audit firm and the implied cost of equity capital from 2006 to 2010. We find that, across all three specifications of the dependent variables (Price Earnings to Growth ratio, Modified Price Earnings to Growth ratio and Gode and Mohanram model), mandatorily switched firms have a significantly negative association with the implied cost of equity capital. These results are found to be robust using the arithmetic mean of the implied cost of equity capital. These results indicate that investors expect a lower ex-ante return from the firms switching audit firm mandatorily than from other firms. We infer that investors perceive mandatory audit firm rotation provide an environment to qualified audit through enhanced auditor independence and skeptism, the cost of equity capital thus is decreased. We expect that this study contributes to improve understanding of the impact of mandatory audit firm rotation on information risk evaluations and provides political implication to policy makers by presenting the benefit of mandatory audit firm rotation. Index Terms - Mandatory Auditor Rotation, Cost of Equity Capital, Audit Quality Perception