The Stock Price Effect of Emerging From Bankruptcy and The Associated Effect of Switching Auditors Post Bankruptcy… An Industry Analysis

This study analyzes firms that emerge from Chapter 11 bankruptcy withspecific attention given to two groups; those that switch auditors post-bankruptcy,and those who retain previous auditors in a post-bankruptcy environment. In addition,further analysis is made to assess whether or not industry membership, along withpre or post SOX environment play a role in results.Results indicate that when the pre versus post SOX environment is assessed,a significant difference is noted in the sample firms. Post SOX firms emergingfrom Chapter 11 that switch auditors carry positive information content, therefore,investors tend to bid up the price of stock of these firms. Firms emerging fromChapter 11 in a post SOX environment that do not change auditors tend to conveynegative information content as their stock price is bid down by investors. Withrespect to a pre SOX environment, results indicate that investors do not behavesignificantly different whether the firms change auditors or not after emerging fromChapter 11. In both cases, there is a positive correlation between earnings responseand stock price.When attention turns to assessing individual industries in a post SOXenvironment, a positive correlation between earnings response and stock priceis seen across all industries evaluated when the firm emerging from Chapter 11switches auditors. Growth industry firms show the greatest stock price reaction toearnings. With respect to firms that do not switch auditors post-bankruptcy, resultsare mixed across industries. Most industries show a negative stock price reactionbut certain growth industries reflect a positive reaction. In a pre SOX environment,no significant industry difference is noted, either by firms that switch auditors orthose that do not switch. All pre SOX industry firms, on average, have a positivecorrelation between earnings response and stock price.