Do Investors Care about Auditor Dismissals and Resignations? What Drives the Response?

SUMMARY: This paper uses market response tests to document key factors that help explain why investors find some auditor change announcements informative and others not. We find that the key drivers of investor response relate more to economic fundamentals than to the auditor change attributes in mandated auditor change disclosures. Investors react most negatively to resignation announcements (and much less for dismissals), and this response increases for companies with prior securities litigation and higher bankruptcy risk. Once we control for these factors, mandated auditor change disclosures other than an indication of resignation, while significant, have only limited ability to explain the price drop around an auditor change announcement.