Impact of Audit Quality and Auditor Changes on Market Reactions: A Panel Estimation within the Context of Bangladesh

Abstract

The objective of this study is to examine the impact of audit quality and auditor changes on market reactions. Using random effects and the GMM model for robustness, the study used 63 manufacturing companies listed on the Dhaka Stock Exchange (DSE) from 2014 to 2022. Market reaction has been measured through market capitalization, while audit quality is evaluated using a dummy variable for Big 4 firms and absolute discretionary accruals calculated via the Modified Jones Model. Auditor changes are measured by the audit firm and partner tenure and rotation. The study reveals that audit quality significantly enhances market reactions. Conversely, auditor changes do not significantly affect market reactions, suggesting investors believe independence remains intact regardless of auditor changes. The findings highlight a limited engagement of companies with Big 4 auditors, potentially due to high fees. The results have been discussed through the lens of agency theory. Higher audit quality may reduce information asymmetry between shareholders and managers, mitigating the agency problem. The results indicate that Big 4 auditors can guarantee superior audit quality. The relationship of auditor changes and market reactions is found to be conflicting and debatable in the literature. Also, there is a dearth of research on the impact of audit quality and auditor changes on market reactions in an emerging economy like Bangladesh. This study may contribute valuable insights by examining key issues and recommending that policymakers foster competition in the audit market by supporting non-Big 4 firms to enhance audit quality. Additionally, it encourages future research into the reasons behind companies' reluctance to engage Big 4 auditors using varied methodologies.