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Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting Firms
Journal article   Peer reviewed

Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting Firms

Hsihui Chang, C. S. Agnes Cheng and Kenneth J. Reichelt
Auditing : a journal of practice and theory, v 29(2)
01 Nov 2010
DOI: https://doi.org/10.2308/aud.2010.29.2.83

Abstract

Business & Economics Business, Finance Social Sciences
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.

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60 citations in Web of Science
65 citations in Scopus

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Collaboration types
Domestic collaboration
Web of Science research areas
Business, Finance
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