Auditor Downgrades During Financial Distress When the Market is Rational

40 Pages Posted: 7 Mar 2010

See all articles by Illoong Kwon

Illoong Kwon

Seoul National University

Jing Pan

affiliation not provided to SSRN

Date Written: February 2010

Abstract

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

Kwon, Illoong and Pan, Jing, Auditor Downgrades During Financial Distress When the Market is Rational (February 2010). Available at SSRN: https://ssrn.com/abstract=1565833 or http://dx.doi.org/10.2139/ssrn.1565833

Illoong Kwon (Contact Author)

Seoul National University ( email )

Graduate School of Public Administration
599 Gwanak-ro
Gwanak-gu, Seoul 151-742
Korea, Republic of (South Korea)
82-2-880-8551 (Phone)
82-2-877-2411 (Fax)

HOME PAGE: http://www.albany.edu/~ik325357/

Jing Pan

affiliation not provided to SSRN ( email )

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