Do Shareholder Activists Care about Accounting and Audit Quality?

Abstract

We ask whether accounting and audit quality issues are determinants of shareholder activism. Activism refers to investor attempts to change firm policies and practices. Accounting and audit quality directly impact the information used by investors in investment decisions. If issues are present, we expect shareholders to act in an effort to improve information quality and overall governance. We proxy for accounting and audit quality and activism using abnormal audit fees and auditor size and governance proposals, respectively. Consistent with expectations, we find future activism intensity is negatively associated with accounting and audit quality. These results are concentrated in firms with low accounting and audit quality, are evident for different types of proposals, and are robust to sensitivity tests (e.g., the inclusion of firm fixed effects). Overall, the associations we document are consistent with accounting and audit quality being antecedents of activism.

Keywords: Shareholder Activism, Accounting Quality, Audit Quality, Abnormal Audit Fees

JEL Classification: G30, M41