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Auditor Switching, Earnings Quality, and the Cost of Capital
Lee - Seok Hwang, Seoul National University
Kyung - Tae Kim, University of Seoul
Su - Keun Kwak, Seoul National University
ABSTRACT. This study examines the relation between auditor switching and market response among Korean listed firms. This study tests not only the direct association between auditor switching and market response, but also the effects of auditor switching on market response to earnings quality. This study also tests whether auditor size change produced by auditor switching affects on the association between auditor switching and market response. The result shows investors perceive auditor switching which decrease audit quality more sensitive than the others. And, investors consider auditor switching when they respond to earnings management. These results suggest that investors not only respond to auditor switching per se, but also consider the auditor switching when pricing earnings quality. These incremental effects are notable in the firms which increase audit quality, which means those investors’ concerns on auditor switching decreases when auditor switching leads to audit quality increasing.
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