THE EFFECT OF AUDITOR CHOICE ON THE EARNINGS-TO-RETURNS RELATIONSHIP: THE CASE OF MALAYSIA

The literature on the relationship between share price and earning of firms has questioned whether the nature of adjustment of prices to earnings information is homogeneous. This paper attempts to address the issue of choice of auditors by Malaysian listed firms and its effects on the credibility of the earnings generated, by analyzing the impact of the witch on the Earnings Response Coefficients (ERCs). The widely accepted perception that auditor quality is correlated with auditor size is not supported for the long window test in this study. However, in the short window test, the investors view the earnings generated by listed firms engaging the services of non-Big 5 audit firms as underestimated. The investors reward higher abnormal returns for the unexpected earnings disclosed around the earnings announcement dates for non-Big 5 clients than Big 5 clients. Finally, the findings of this study not only substantiate the findings on similar research from developed markets but also document the extension of the findings in the context of an emerging market.