How Do Investors Respond to Disclosure of Audit Quality Indicators

Both U.S. and international standard setters have sponsored initiatives to develop a reliable portfolio of audit quality indicators (AQIs). We conduct two experiments to examine how investors, the primary beneficiary of the financial reporting process, respond to receiving auditor-disclosed AQIs. We find that investors experience a stronger negative affective reaction towards the auditors when receiving a negative-trending AQI portfolio compared to receiving a positive trend of AQIs or when no AQIs are disclosed. In turn, investors receiving a negative-trending AQI portfolio are less likely to support ratification of the audit firm and choose to voluntarily decrease their investment in the company. Results also indicate that including additional qualitative context within the disclosure increases investor support for auditor ratification when accompanying a positive-trending AQI portfolio but has no additional effect on investor decision-making for a negative-trending AQI portfolio. We conclude that publi...