Market reaction to auditor switching from big 4 to third-tier small accounting firms

Hsihui Chang, Cheng-shing Cheng, Kenneth J. Reichelt

Research output: Journal article publicationJournal articleAcademic researchpeer-review

35 Citations (Scopus)

Abstract

After the demise of Arthur Andersen, the public accounting industry has witnessed a significant migration of public clients to second-tier (Grant Thornton and BDO Seidman) and smaller third-tier accounting firms. While prior literature documents that smaller auditors are perceived by the stock market as an inferior substitute for a Big 4 auditor, this perception appears to have changed in recent years. In this paper, we analyze market responses to auditor switching from Big 4 to smaller accounting firms during 2002 to 2006. We break our sample period into two separate periods (Periods 1 and 2) based on when regulatory changes occurred. These changes included Sarbanes-Oxley (SOX) 404 implementation, Public Company Accounting Oversight Board (PCAOB) inspections, and a tightened Form 8-K filing deadline. We find a relatively more positive stock market reaction to clients switching from a Big 4 to a smaller third-tier auditor in Period 2. This relatively more positive reaction in Period 2 reflects companies seeking better services rather than a lower audit fee, when an audit quality drop is less likely. Overall, our results suggest that companies and investors have become more receptive to smaller accounting firms.
Original languageEnglish
Pages (from-to)83-114
Number of pages32
JournalAuditing
Volume29
Issue number2
DOIs
Publication statusPublished - 1 Nov 2010
Externally publishedYes

Keywords

  • Audit quality
  • Auditor switching
  • Big 4
  • Market reaction
  • Small accounting firms

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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