Auditor switch, analysts forecasts and executives stock options

This paper shows that companies tend to switch auditors when audit opinions are inconsistent with those in the previous period, financial performances are worse, and both stock and option values fall. We find no evidence that, during the switching year, option values and firm performance affect the exercise of executivesʹ stock options, possibly because the exercise of stock options often occurs before switching auditors in order to prevent the SEC from investigating insider trading in the switching year. The changes in holdings of executivesʹ stock options are positively correlated with the degree to which analystsʹ earnings forecasts deviate from previous periods; the announcements of analystsʹ earnings forecast errors have no influence on the value of executivesʹ options, since that signaling effect has already reflected on the stock price. Furthermore, accruals are unrelated to the changes in holdings of executive stock options, possibly because investors often have negative beliefs about auditor switches, so executives do not tend to take advantage of this opportunity to manipulate earnings.