Auditor Dismissals: What Does Timing Reveal that Disclosures Do Not?
60 Pages Posted: 9 Jun 2017 Last revised: 25 Feb 2019
Date Written: October 1, 2017
Motivated by the ambiguity of auditor dismissal disclosures, this study informs about an alternative signal – the timing of the dismissal – for inferring the implications of dismissals. When dividing the reporting year into five dismissal periods, we find largely monotonic increases in the probability of future restatements, material weaknesses, and delistings across the five periods. Dismissal timing predicts these events incremental to information in the dismissal disclosure and other predictors, although the predictive power for delistings is solely driven by extremely late (Period 5) dismissals. In contrast, mandatory disclosures about the circumstances of dismissals have little incremental predictive power. Modest and statistically weak drifts in stock price follow the mandatory disclosures, indicating an investor tendency to slightly underreact to them.
This study was formerly entitled, "Auditor Dismissals: Opaque Disclosures and the Light of Timing".
Keywords: auditor dismissal, auditor resignation, restatement, material weakness, delisting
JEL Classification: M40, M41, M42, M48
Suggested Citation: Suggested Citation