An Examination of Short-Selling Activity Surrounding Auditor Changes

Benjamin M. Blau · Tyler J. Brough · Jason L. Smith · Nathaniel M. Stephens

23 citations0/0 files storedJournal of Accounting Auditing & Finance

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

Using a combination of short-selling data made available by Regulation SHO and auditor change data disclosed in companies’ SEC filings, we examine whether short sellers (a) discern between “good news” and “bad news” auditor changes and (b) increase their revenue by trading around auditor change announcements. We find that short sellers systematically increase activity following certain auditor changes, which include auditor downgrades (i.e., change from Big 4 auditor to non-Big 4 auditor), auditor resignations, and auditor changes involving a disagreement between management and the departing auditor. Our results indicate that short sellers are able to generate significant returns by systematically taking short positions pursuant to specific types of “bad news” changes.

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References

2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1981Auditor size and audit quality 2004Information and the Cost of Capital 1987Constraints on short-selling and asset price adjustment to private information 2007Which Shorts Are Informed?2001Short-sellers, fundamental analysis, and stock returns 1993Auditing Standards, Legal Liability, and Auditor Wealth 2012Short Selling and the Price Discovery Process

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