Market Reaction to Auditor Ratification Vote Tally

Abstract

SYNOPSIS This paper provides empirical evidence that the proportion of shareholder votes against the ratification of the auditor is informative to investors' perception of the auditor-client relationship. We find that lower shareholder approval of the auditor is associated with a negative market reaction to the 8-K announcement of the auditor ratification vote. Additionally, we find that the market reaction is more negative when a high level of auditor dissatisfaction is likely a surprise to investors, such as when audit and auditor characteristics suggest that the auditor provides high audit quality. We provide confirming evidence that withheld votes are associated with a higher likelihood of a future auditor dismissal and that the market reaction to the dismissal is more positive for firms with lower shareholder approval of the auditor. JEL Classifications: G34; G30; M40.

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