The auditor change decision in UK : factors and market reaction

Abstract

Purpose: This study examines the firm's characteristics and the corporate governance factors that influence the auditor change decisions, and observes the market reaction following the announcement of such decisions. Design/methodology/approach: The relation between the firm's characteristics and the corporate governance factors with the auditor change decision is addressed using a logistic regression. The market reaction to the auditor change announcement is tested using the event study methodology. Findings: The results show that the company's size is positively related to the auditor change decision and especially to the choice of a big 4. The executive board members gender diversity, the board independence and the board members compensations are found to be negatively related to the auditor choice decision. Furthermore, a positive market reaction to the switch to a big 4 has been detected, one day after the auditor change announcement. Research limitations: The relation between the ownership structure and the auditor change decision is not addressed in this thesis due to data unavailability. Furthermore, the majority of the companies in the sample are those changing to big 4 auditors, and consequently the analysis excluded the non-big 4 successor cases. Practical implications: By revealing the hidden intentions behind the auditor changes, the tax authorities, the creditors and the shareholders will be able to take more accurate decisions concerning their stake in the companies engaging in such changes. Furthermore, the regulatory bodies will be aware of the audit industry problems that need to be resolved. Originality/value: First, The UK market is a new context for this type of research. Second, in the presence of outdated studies tackling the market reaction following the auditor change announcements, a contemporary study is needed. Third, this thesis has examined three board factors that no previous studies have tackled.