Abstract
This study investigates the information content of the announcement of an auditor resignation. The Securities and Exchange Commission (SEC) requires that the Form 8-K which reports a change in auditors also indicate if the change is due to the resignation of the auditor. This action implies a belief by the SEC that an auditor resignation may communicate different information to the market than would the termination of an auditor by a client company. The results of this study support the hypothesis that the announcement of an auditor resignation has information content for the market. The reaction to the announcement is significantly negative on the day of the filing of the 8-K, the day following, and in the two-day window taken as a whole. Alternative explanations for the observed negative returns are explored and rejected. Results of an examination of a portfolio of companies failing to provide a reason and name a successor, and a portfolio of companies giving a reason for the auditor resignation or of giving information concerning the successor auditor reveal no significant differences between the returns of these portfolios. No difference is observed in the response of a portfolio of companies providing a reason for the resignation and a portfolio of those companies which fail to provide a reason. Tests are performed to test the sensitivity of the results to the deletion of outliers and the deletion of companies having firm-specific news announcements in the event window. It does not appear that extreme outliers or firm-specific new announcements are responsible for the negative returns exhibited in this sample of companies. The sensitivity of the results to day-of-the-week effects is tested and also rejected as a possible explanation for the negative returns observed in this sample. It appears that significant and persistent negative returns are earned by companies' shareholders when it is announced that auditors have resigned.
Wells, Donald Wayne (1993). The market effects of auditor resignations. Texas A&M University. Texas A&M University. Libraries. Available electronically from
https : / /hdl .handle .net /1969 .1 /DISSERTATIONS -1521998.