The market effects of auditor resignations Academic Article uri icon


  • This study investigates the information content of auditor resignations. The Securities and Exchange Commission (SEC) requires that Form 8-K not only report a change in auditor, but also disclose if the change is due to the resignation of the previous auditor. The SEC's action implies that an auditor resignation provides information to users of financial statements; however, there is mixed evidence in the literature about the valuation implications of the disclosure. The results of this study support the hypothesis that resignations have information content. A negative price reaction at the release of the Form 8-K suggests that the resignation was unexpected by the market and interpreted as "bad news." In most cases the firm does not disclose the auditor's reason for resigning, so the market may infer that the resignation is a signal of the auditor's private information about the firm or its managers. The most likely source of such an inference may be the reasons for resignations listed in the professional standards. The study contributes to the body of research that examines the market response to various audit-related events such as selection of auditors, issuance of audit opinions, and changes in auditors. For policy makers, the value-relevance implied by the market reaction suggests that the mandatory disclosure rules are useful to investors.

author list (cited authors)

  • Wells, D. W., & Loudder, M. L

complete list of authors

  • Wells, DW||Loudder, ML

publication date

  • January 1997