Traditionally, an auditor switch is interpreted as bad news because the switch seems to be motivated by manager's effort to avoid a future qualified opinion from the incumbent auditor or to manipulate accounting numbers favorably for the firm. This view is supported by empirical evidence of negative market reaction to auditor switches in prior studies. However, motivation for auditor switches may differ among firms with different pre-switch audit opinions and with different financial conditions and so are the market implications of the switches. Thus, some auditor switches may be good news, especially if they signal managers' confidence for their firms' future financial conditions. By controlling for the motivations through financial condition and pre-switch audit opinion, this study provides evidence on differential market reactions to auditor switches: (1) For firms with improving financial condition, there exist no abnormal returns for the pre-switch unqualified firms while the abnormal returns for the pre-switch qualified firms are positive. (2) For firms with deteriorating financial conditions, the abnormal returns are negative for both the pre-switch unqualified firms and the pre-switch qualified firms.
