Auditor Resignations versus Dismissals : An Examination of the Differential Effects on Market Liquidity and Trading Activity

This study addresses whether an auditor change (a resignation or a dismissal) mitigates information asymmetry as measured by market liquidity or trading activity. For auditor dismissals our results show no effect on our sample firms' market liquidity or trading activity. By contrast, for auditor resignation firms, the market liquidity tests indicate that the 12 month period preceding the 8K filing is characterized by rising information asymmetry. Also, our trading activity analysis suggests that the 8K auditor resignation filing is informative for individual investors but fails to support such informativeness for institutional investors. Our findings lend support for the SEC's decision to differentiate between auditor resignations and dismissals in the 8K. However, the resignation announcement does not appear to decrease infor­mation asymmetry subsequent to the 8K filing, which is inconsistent with the presumed SEC objective of maintaining public confidence in the securities markets as a level playing field by mitigating information asymmetry