Early-tenure CEOs and Auditor Locality

Recent literature suggests that locals have an informational advantage over nonlocals (Coval and Moskowitz 2001; Ivkovic and Weisbenner 2005; Bae et al. 2008; Lim and Nguyen 2021). In line with this, local auditors, compared to non-local auditors, provide higher-quality auditing services (Choi et al. 2012). Previous studies have also found that the CEO’s personal traits influence the firm’s decisions and performance (Hambrick 2007). For example, earnings overstatement is more pronounced in the early years than in the later years of CEOs' service due to their career concerns (Ali and Zhang 2015). Building on this literature, we investigate the early-tenure CEO’s effect on the firm’s auditor selection, especially auditor locality. Our empirical analyses reveal that firms are less likely to choose local auditors in the early years of a CEO’s service compared to the later years. While exploring the underlying reasons, we find that firms with early-tenure CEOs are more likely to have lower-quality financial statements and a higher probability of financial fraud than firms led by CEOs with later years of service. We contribute to the auditing literature by highlighting how CEOs' individual traits affect auditor selection.