An Investigation the Effect of Auditor Partner Rotation, Auditor Size and Tenure on Investors Expected Rate of Return in Listed Companies of Tehran Stock Exchange (TSE)

Aims: The purpose of this study is to determine the impact of Audit quality attributes such as audit partner rotation, auditor size and auditor tenure on Investors Expected Rate of Return in Listed Companies of Tehran Stock Exchange (TSE).

Study Design: This research in terms of purpose is of applied type and in terms of nature is semi-experimental. That its results can be useful for a wide range of corporate stakeholders.

Place and Duration of Study: The used data have been extracted from the companies accepted in Tehran Stock Exchange (TSE) from 2005 to 2010 to determine the relationship between qualitative characteristics of audit and return rate expected by investors.

Methodology: In this Study, cost of equity is the dependent variable and Auditor Partner Rotation, Auditor Size and Tenure as the audit quality characteristics are the independent variables. Also, three control variables of ratio of book to market value, financial leverage and firm size are introduced to regression equations to control the impact of risk factors. In this regard, for measuring Cost of equity was used Gordon growth model. For data analysis and test of research hypothesis, multivariate regression equation has been used. To carry out the research, using Tadbir and Rahavard-e-Novin softwares, the required quantitative data and information have been extracted from financial statements and other financial reports of the audited companies.

Results: The results obtained from hypotheses test have shown that there is a positive and significant relationship between size of audit firm and return rate expected by investors. Therefore, the findings indicate that there is a negative relationship between auditor tenure and return rate expected by investors; however, this relationship is not statistically significant. In addition, the results show that there is a positive and significant relationship between the short-term rotation period of audit partner and return rate expected by investors.

Conclusion: According results obtained from hypotheses test, it can be inferred that cost of equity increases by increase of audit firm size. In other words, decreasing the audit quality is resulted in decrease of reliability of financial statements and risk of decision-making for investors. Moreover, the results of this research indicate that investors probably do not care much about audit firm and auditor partner tenure in their decision-makings about expected rate of return.