Do Investors Care Who Led the Audit in the U.S.? Evidence from Announcements of Accounting Restatements

Abstract

In 2015, the PCAOB mandated the disclosure of audit partner names on Form AP. Although Form AP aimed to help investors assess the quality of audit partners and their audits, prior studies indicate that investors did not immediately respond to the filing of the disclosure nor did it have an immediate impact on audit quality. In this study, we examine whether investors value audit partner disclosures using a high-power setting, whereby audit partners experience a shock to their track records due to clients’ accounting restatements. We find that an audit partner’s non-restating clients exhibit a significantly negative market reaction to the announcement of a client restatement for which the partner signed off on misstated financial statements. This effect is concentrated in more severe restatements and occurs even for Big 4 auditors. Our findings provide novel evidence that audit partner disclosures in the U.S. provide useful information to equity markets.

Keywords: Audit partners, disclosure, equity market returns, PCAOB