Study of Market Reaction to Auditor Switches:Effects of Industry Specialist

This paper investigates the market reactions to auditor switches to and from industry specialist auditors. It examines whether the market reaction would be more positive for auditor switching to Both National and City level industry specialist (BS) auditor using the framework developed in Ferguson et al. (2003) and Francis et al. (2005). Prior studies suggest that industry specialist auditors, specifically when the auditor is BS, have higher audit quality compared to non-specialist auditors and that the market reacts positively to firms switching to Big 4 specialist and reacts negatively to firms switching from Big 4 specialist. Thus, if the market is able to distinguish between the differences in audit quality of specialist auditors, I expect that the market would respond most positively to firms switching to BS auditors.
This study is based on the Market Adjusted Model methodology used in event studies and consists of examining whether positive cumulative abnormal returns accrue to firms which switch from a non-specialist audit firm to Big 4 specialist audit firm, and vice versa. While some of the results are consistent in direction, the results are not statistically significant. Some implications of this finding are discussed in the concluding section.