A Note on the Potential Usefulness of Separate Consideration of Different Types of Auditor Changes in Market Reaction Studies

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Abstract

Research examining market reactions to auditor changes has generally yielded models with low explanatory power (typically single digits). Part of the reason for this low explanatory power may relate to treating all auditor changes as one type of event; implicitly assuming that market reaction to different types of auditor changes would all be affected by the same factors. We consider whether certain types of auditor changes may be more predictable than other by splitting our observations based on the Big 4 status of the old and new auditors. We find that the most explainable market reactions are those in which a client moves from a non-Big 4 to a Big 4 auditor, with this model explaining nearly 25% of the variation in market reaction.

Authors

• Richard Holwczak, CUNY - Baruch College

• David Louton, Bryant University

• Hakan Saraoglu, Bryant University

• Charles P Cullinan, Bryant University