Auditor Changes and Stock Price Crashes

Kyung Yun Lee, Purdue University


This paper examines auditor changes around a client firm’s stock price crash. Overall, the study suggests that a firm’s crash risk has a different impact on auditor-initiated changes (resignations) than on firm-initiated auditor changes (dismissals). My most important findings are that auditor size affects auditor-client relationship decisions before a crash occurs: Big 4 auditors tend to resign from client firms with a high crash risk, and firms with a high crash risk are more likely to dismiss Big 4 auditors than non-Big 4 auditors. However, auditor size becomes irrelevant once a crash occurs. Therefore, this paper provides evidence that firms and their auditors face different incentives to alter their relationship prior to a stock price crash and that these incentives change following a crash.




Watts, Purdue University.

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