Market Reactions to Disclosure of Reportable Events

Posted: 23 Sep 2002 Last revised: 4 Jun 2016

See all articles by Scott Whisenant

Scott Whisenant

University of Kansas

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

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Date Written: March 1, 2003

Abstract

This study investigates the information content of FRR No. 31 reportable events (SEC 1988) communicated by auditors to clients in the two fiscal years and interim period preceding auditor changes. Reportable events identify weaknesses in internal control and problems related to the reliability of management representations and/or financial statement reliability. We examine 1,264 auditor changes (with available stock price data) over the period 1993 to 1996, including 118 companies with reportable events. Our findings suggest that reportable events, disclosed in Form 8-K filings of auditor changes are considered by investors to have information content. We find a -2.75 percent (-5.53 percent) cumulative abnormal return over a three-day (seven-day) announcement period surrounding the disclosure of reportable events in Form 8-K filings. The conclusion that reportable events offer useful information to investors is robust to alternative specifications of expected returns and to controls for other disclosures (resignations and disagreements) made when auditor changes occur. Further tests also highlight differential information content among the types of reportable events. Specifically, stock prices act as if investors find reportable events about reliability issues more informative than reportable events about internal control weaknesses.

Keywords: reportable events, auditor changes, financial disclosure reliability

JEL Classification: M41, M45, M49, G12

Suggested Citation

Whisenant, Scott and Sankaraguruswamy, Srinivasan and Raghunandan, Kannan, Market Reactions to Disclosure of Reportable Events (March 1, 2003). Auditing: A Journal of Practice and Theory, Vol. 22, No. 1, pp. 181-194, March 2003. Available at SSRN: https://ssrn.com/abstract=326440

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Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

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Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

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