Auditor Realignment and 8-K Disclosures : Usefulness for Investor Decision Making

This study extends prior studies on auditor changes by testing (1) whether investors react to 8-K disclosures, and (2) the probability of investors anticipating a potential switch. The study includes 136 firms that both switched and did not switch auditors. It is hypothesized that investors would find it difficult to ascertain the true motives behind auditor changes. Event methodology and logit analysis are used. The results indicate a negative drift in abnormal returns prior to the switch, followed by significant positive abnormal returns on the day of the switch, and a positive drift after the switch