Auditor Changes and Information Risk

An audit increases the credibility of financial reports by reducing the uncertainty in financial information. A change of auditor will prompt investors to reevaluate this uncertainty. I examine the association between auditor changes and the pricing of information risk using the Fama-French asset pricing model augmented with accounting- based information risk factors. On average, I find that the pricing of information risk decreases after an auditor change, suggesting that investors are less concerned about information risk after an auditor change. However, for auditor changes that involve auditor resignations, disagreements, and movements away from a Big 4 auditor, I find an increase in the pricing of information risk, implying that these changes are associated with a weakened information environment. I also show that market returns surrounding the change announcement are correlated with the future change in perceived information risk. My study contributes to the debate surrounding mandatory auditor rotation and auditor tenure by suggesting that not all auditor changes are perceived the same way by investors.