The Effects of CEO Dismissal of Product Market Competitors on Audit Risk

This paper focuses on whether and how peer‐forced chief executive officer (CEO) turnover affects audit risk. This research reveals that auditors charge higher fees for client firms when product market peers dismiss CEOs. Its findings are consistent with the prediction that the forced turnover of peer firms transmits product market‐wide risk, prompting auditors to heighten risk assessments. Affected firms are also more likely to receive modified audit opinions and to meet or beat the zero earnings threshold, as well as exhibit higher abnormal accruals. These findings demonstrate that peer CEO dismissals amplify audit risks. This research also reveals that the positive influence of forced CEO turnover on audit risk is mitigated by a better information environment and longer audit tenure.