Author(s)

Chieh-Shuo Chen¹, I-Shiu Chen², Tung-Chin Yang³, Cheng-Yen Huang³

¹Department of Accounting, National Changhua University of Education, Chinese Taipei.
²Urban Development Bureau of Taichung City Government, Chinese Taipei.
³Department of Finance, National Changhua University of Education, Chinese Taipei.

This study examines the impact of audit-partners departure from Big4 to small-sized audit firm on the relationship between earnings and stock prices for audited clients. The research finds that for audited clients associated with Big4 audit firm, the departure of audit-partners enhances the earnings-to-stock price relationship, indicating increased investor trust and perceived potential benefits in cohesion and audit quality. However, the departure has no significant effect for audited clients of the small-sized audit firm. Robust tests further find that when expanding the sample to encompass audited clients of all audit firms or employing the regression analysis of unexpected earnings on cumulative abnormal returns, not only the earnings response coefficients for audited clients of the Big4 audit firm significantly increase after the departure event of audit-partners, but also those for audited clients of the small-sized audit firm significantly decreases the departure event of audit-partners. Moreover, the magnitude of change in earnings response coefficients between the two types of audit clients displays significant differences. This indicates that the departure event of audit-partners from Big4 can augment the earnings information content for the audited clients of the Big audit firm, while potentially diminishing the earnings information content for audited clients of the small-sized audit firm that has newly incorporated audit-partners from Big4. It suggests that the immediate enhancement of professional competence and audit quality in a small-sized audit firm with newly added audit-partners is not guaranteed. Rather, there might be integration misunderstandings that trigger investor concerns, thereby reducing the impact of audited clients’ earnings on stock prices.

Audit-Partner, Big4 Audit Firm, Earnings Response Coefficient, Stock Market, Audit Quality

Chen, C. , Chen, I. , Yang, T. and Huang, C. (2023) Exploring the Departure of Audit-Partners from Big4 to Small-Sized Audit Firm: Perception from Stock Market Investors. Modern Economy, 14, 1485-1503. doi: 10.4236/me.2023.1411077.