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Stock market reaction to auditor changes by OTC firms

University of British Columbia

This thesis examines the stock market reaction to auditor change announcement by OTC firms. The general motivation stemmed from previous research on this topic that 1) failed to adequately motivate the empirical investigation and 2) found insignificant results. The theoretical justification for expecting a market reaction is based on the existence of product differentiation in the market for audit services in terms of the level of credibility an auditor can offer. It is conjectured that client firms will demand more credibility as the proportion of external ownership in the firm increases. Management's re-evaluation of their optimal residual firm value and perquisite consumption combination after a change in the ownership structure is suggested as a possible reason for an auditor change. The auditor change signals information about the manager and causes a market reaction. A sample of 44 non-Big Eight to Big Eight and 15 Big Eight to non-Big Eight auditor changes are examined. The standard event study method of abnormal residual analysis is replaced with a new method in which cross-sectional market model regressions in the announcement and a control period on the same firms are compared. Results provide strong evidence that the increase in firm value from an auditor change announcement is greater for non-Big Eight to Big Eight changes than Big Eight to non-Big Eight changes. Evidence is also found that firms changing auditors experience greater variability in returns during an announcment period than during a control period prior to the change.

Text

2010-06-14

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http://hdl.handle.net/2429/25716

Business Administration

University of British Columbia

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