Should Uninformed Shareholders Vote? Evidence from Auditor Ratification
55 Pages Posted: 8 Feb 2018 Last revised: 1 Jun 2018
Date Written: May 25, 2018
We investigate the extent to which the auditor ratification vote provides a mechanism to facilitate effective corporate governance. We find that, on average, shareholder votes against auditor ratification are not associated with audit failures (restatements) but are strongly associated with investment performance (stock returns). However, using institutional ownership as a proxy for the extent to which the voting base is likely to be informed, we find that the auditor ratification vote is more informed (i.e., driven by factors that reflect auditor performance) when institutional ownership is higher. Finally, we find that the probability of auditor dismissal is increasing in the proportion of votes against auditor ratification, regardless of the level of institutional ownership. Collectively, our results suggest that some auditors are dismissed for factors unrelated to auditor performance. This finding is inconsistent with arguments of auditor ratification vote proponents who have pushed for the mandatory adoption of the vote.
JEL Classification: M41, M42
Suggested Citation: Suggested Citation