Article2002

Market Response to Earnings Surprises Conditional on Reasons for an Auditor Change

116 citations0/0 files storedContemporary Accounting Research

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

Abstract

Abstract Our interest in this study is the relative informativeness of earnings announcements reported before and after Form 8‐K disclosures of the reason for an auditor change. We appeal to several models that predict that the market's response to an earnings surprise is positively related to the perceived precision of the earnings report. We predict that the Form 8‐K reason disclosures aid investors in updating their expectations of earnings precision by providing useful information about the financial reporting process that produces the earnings report. For 802 auditor changes from late 1991 through late 1997, the average price response per unit of earnings surprise is lower subsequent to an auditor change for companies that switched for disagreement‐related or fee‐related reasons and higher for those that switched for service‐related reasons. This paper provides further evidence on the effects of differential earnings quality on differences in the returns‐earnings relation across companies and over time as well as the efficacy of Form 8‐K disclosures of reasons for auditor changes.

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References

1998The Effect of Audit Quality on Earnings Management*1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 1980The Pricing of Audit Services: Theory and Evidence 1995The information content of losses 1989An analysis of intertemporal and cross-sectional determinants of earnings response coefficients 1995Auditor brand name reputations and industry specializations 1993Perceived Auditor Quality and the Earnings Response Coefficient 1994The Production of Audit Services: Evidence from a Major Public Accounting Firm

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