Auditor Independence, Dismissal Threats, and the Market Reaction to Auditor Switches

The article presents information on the effect of auditor changes on security prices in both a mechanical decision rule and in the possibility that an adverse audit opinion may lead to dismissal. The analysis implies that the stock price response to the announcement of an auditor change depends on the preswitch audit opinion. The author contends that his research proves auditor switches can be good for investors and that even when they are costless, and there is no collusion between auditor and firm, market reaction can be negative.