Votes Against Auditor Ratification and Audit Pricing – Evidence from a Mandatory Ratification Setting
39 Pages Posted: 28 Sep 2017 Last revised: 31 Jul 2019
Date Written: September 26, 2017
This paper empirically examines the impact of shareholder ratification of auditors (SRA) voting results on audit fees in a mandatory ratification setting (i.e., Germany). Motivation for our study comes from the widespread implementation of SRA in Europe. Furthermore, it addresses calls for research by US scholars on the effect of mandatory SRA voting results and on SRA outside the US. We find that an economically significant magnitude of negative votes on auditor ratification is associated with higher audit fees. This result is robust to several robustness tests, including change analysis, estimation of the impact threshold for a confounding variable (ITCV), and propensity score matching. However, we do not find evidence that significant shareholder disapproval is associated with higher audit quality, indicating that the higher audit fee paid is not justified by additional benefits for shareholders but rather driven by auditors’ pricing strategies. We further find that there is no significant association between shareholder disapproval and audit fees when shareholder disapproval is likely to be driven by proxy advisors’ voting recommendations. Our study is, to the best of our knowledge, the first to examine the impact of SRA voting results on auditor behavior.
Keywords: mandatory shareholder ratification of auditors; audit fees; audit quality; audit regulation
JEL Classification: M4; M42; M48; G3; G39
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