AUDITOR CHANGE ANNOUNCEMENTS AND DISPERSION OF INVESTOR EXPECTATIONS

Abstract

The effect of auditor change announcements on the dispersion of investor expectations is investigated by using two approaches. First, the consensus effect (Holthausen and Verrecchia, 1990) is measured by examining unanticipated trading volume change. We show that auditor change announcements provide information to the market, and that the consensus effect dominates the informedness effect. Second, the reduction in information asymmetry (Glosten and Milgrom, 1985) due to auditor change announcements is demonstrated by a reduction in proportional bid‐ask spread, which is not driven by increased trading volume. Thus, auditor change announcements reduce dispersion of investor beliefs in that they are both information asymmetry‐reducing and consensus‐increasing. Finally, we show that the type of auditor change (Big‐Eight to Non‐Big‐Eight, Non‐Big‐Eight to Big‐Eight, or Within‐Class) has no impact on the dispersion‐reducing effect of auditor change announcements.