Market Reactions to Disclosure of Reportable Events

This study investigates the information content of FRR No. 31 reportable events (SEC 1988) that describe weaknesses in internal control and problems related to the reliability of management representations and/or financial statement reliability that were previously communicated to clients by their predecessor auditors. Our findings suggest that reportable events, disclosed in Form 8-K filings of auditor changes, convey negative information to investors. We find a -2.75% (-5.53%) cumulative abnormal return over a three-day (seven-day) announcement period surrounding the disclosure of reportable events in Form 8-K filings. The conclusion that reportable events offer information to investors is robust to alternative specifications of expected returns and to controls for other disclosures (resignations and disagreements) made when auditor changes occur. Further tests also highlight differential information content among the types of reportable events. Stock prices act as if investors find reportable events about reliability issues more informative than reportable events about internal control weaknesses. Previous titles: "The Consequences and Information Content of the Types of FRR No. 31 Reportable Events", "The Information Content of Internal Control Related Matters Noted During an Audit in Form 8-K Filings of Auditor Realignments" and "Relation to Auditor Resignations; Auditor Changes and Reportable Events"