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    Market Reaction to Auditor Ratification Vote Tally
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
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    Title:
    Market Reaction to Auditor Ratification Vote Tally
    Practical Implications:

    This study provides empirical evidence that suggests that auditor ratification vote tallies are informative to the market. First, higher auditor ratification disapproval is associated with a more negative stock market reaction to the announcement of the vote tallies, consistent with the argument that this reflects negative investor perception of the auditor. Second, the authors provide evidence that the market reacts positively to an auditor change when there is high shareholder disapproval, and that audit and auditor characteristics moderate or exacerbate the market reaction in a way that suggests the market finds the ratification vote informative, but does not fully price it. 

    Citation:

    Tanyi, P. N. and K. C. Roland. 2017. Market Reaction to Auditor Ratification Vote Tally. Accounting Horizons 31 (1): 141 – 157. 

    Keywords:
    auditor ratification, market reaction, and corporate governance
    Purpose of the Study:

    In light of recent calls to mandate shareholder voting on auditor ratification, this paper illustrates that the ratification vote provides new information to investors. The push to mandate shareholder ratification is supported by many and is largely driven by concerns that most audit committees simply “rubber stamp” management’s recommendation of the auditor. Given that shareholder ratification votes are generally overwhelmingly in favor of the auditor, non-binding, and voluntary, the authors ask whether the market finds any new information in the ratification vote. The authors examine whether the proportion of votes against or abstaining from the appointment of the auditor has capital market consequences. They also examine whether the proportion of non-supporting votes affects how the market reacts to auditor dismissal. 

    Design/Method/ Approach:

    The authors use a sample of firm-year observations with auditor ratification votes over the period of 2010 to 2015. 

    Findings:
    • The authors find higher shareholder disapproval of the auditor is associated with a negative market reaction to the voting outcome announcement; furthermore, they find evidence that this reaction is exacerbated by known auditor or audit-related characteristics and corporate governance measures that are suggestive of high auditor quality, indicating that the market is surprised by the shareholder disapproval.
    • The authors find that the market reacts less negatively to high shareholder disapproval for clients with high non-audit fee ratios, longer auditor tenure, and accounting restatements, indicating that the market is already aware of audit independence or audit quality issues.
    • The authors find that the market responds more positively to a subsequent auditor dismissal when the proportion of shareholder votes against or abstaining from the auditor’s appointment is higher. 
    Category:
    Corporate Matters
    Sub-category:
    Audit Committee Effectiveness