Chris E. Hogan

Market Response to Earnings Surprises Conditional on Reasons for an Auditor Change

Our interest in this study is the relative informativeness of earnings announcements reported before and after Form 8-K disclosures of the reason for an auditor change. We appeal to several models that predict that the markets response to an earnings surprise is positively related to the perceived precision of the earnings report. We predict that the Form 8-K reason disclosures aid investors in updating their expectations of earnings precision by providing useful information about the financial reporting process that produces the earnings report. For 802 auditor changes from late 1991 through late 1997, the average price response per unit of earnings surprise is lower subsequent to an auditor change for companies that switched for disagreement-related or fee-related reasons and higher for those that switched for service-related reasons. This paper provides further evidence on the effects of differential earnings quality on differences in the returns-earnings relation across companies and over time as well as the efficacy of Form 8-K disclosures of reasons for auditor changes.

The effect of reporting restructuring charges on analysts' forecast revisions and errors

Abstract The frequency and magnitude of restructuring charges have drawn the attention of various groups of users of accounting information. Prior studies on restructuring charges have focused on the markets response to the announcement of the charge. In contrast, we examine the charges from the perspective of financial analysts. We provide evidence that analysts expect declining performance for restructuring firms in the short run but possible improvement over the longer term. When we examine forecast errors in the year following the charge, we find evidence that the analysts’ accuracy has declined and, despite the downward revision, analysts are still optimistically biased.