Abstract
I examine two hypotheses of auditor resignation: litigation risk and clientele adjustment. I find resignation is positively related to increased client legal exposure, and to occurrence of clientele mismatch. The summary-measure approach allows me to distinguish clientele mismatch caused by changes in auditor (supply-side) characteristics vs. changes in client (demand-side) characteristics. Evidence suggests resignation is likely driven by supply-side changes. I also find investors react negatively to resignations, and the price drop varies cross-sectionally with litigation risk. Further, the tendency of dropped firms to engage small auditors is positively related to increased litigation risk, and to mismatch with large auditors.
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