Votes Against Auditor Ratification and Audit Pricing – Evidence from a Mandatory and Binding Ratification Setting

This paper empirically examines the impact of shareholder ratification of auditors (SRA) voting results on audit fees in a mandatory and binding 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 audit fees are approximately 11 percent higher following an economically significant magnitude of negative votes on auditor ratification. However, we do not find evidence that significant shareholder disapproval is associated with higher audit quality. We therefore conclude that auditors, rather than engaging in audit quality enhancing measures, respond to large shareholder disapproval by focusing on risk and pricing related strategies that drive audit fees. Our study is, to the best of our knowledge, the first to examine the impact of SRA voting results on auditor behavior