Audit Failure and Stock Price of Clients

In a sample of clients of auditors suffering audit failure from 2000 to 2006, the preliminary test indicates that stock prices of the clients negatively react to the news about audit failure. The further test is conducted in a regression of cumulative abnormal returns. The client which is in worse financial condition and which has ever changed their auditor in recent three years experiences more negative abnormal returns on the news about audit failure. The evidence is consistent with the Information Theory and the Agency Theory.