Auditor Downgrades During Financial Distress When the Market is Rational
40 Pages Posted: 7 Mar 2010
Date Written: February 2010
This paper provides both theoretical and empirical analyses of the relationship between firms' performance and auditor change. The theoretical analysis focuses on the auditor's role as a commitment device not to overstate firms' earnings. We show that even when the investors are fully rational and firms cannot gain from overstatement, firms are more likely to switch to a lower quality auditor during financial distress. This tendency is stronger when firms are less myopic. This paper also discusses empirical evidence from U.S. data, and presents new evidence based on Chinese data.
Keywords: Auditor Switch, Rational Expectation, State Ownership
JEL Classification: L14, L84, M4
Suggested Citation: Suggested Citation