Auditor Office Reputation Damage and Their Audit Clients’ Voluntary Disclosures

We examine how client firms of reputationally damaged auditor offices respond to perceived lower audit quality, focusing on the issuance of management forecasts. We find that nonrestating client firms that stay with their reputationally damaged auditor office increase their number of management forecasts, which is consistent with a substitution effect between audited financial reporting quality and voluntary disclosure. Further, the disclosure response of these clients is more pronounced when the client firm is exposed to a higher information demand environment or is exposed to lower proprietary costs of disclosure. Finally, we document that increases in management forecasts bring market benefits for clients audited by reputationally damaged auditor offices by reducing the cost of equity and improving realized returns for these firms.