Are Audit Committee Disclosures of Auditor Reappointment Factors Legitimacy Enhancing?

SUMMARY Audit committees (ACs) are responsible for appointing external auditors but are not required to (and often do not) provide disclosures about how they accomplish this duty, and investors are concerned about this opacity. We hand-collect data on disclosures of factors considered by the AC in reappointing auditors. We find that disclosure tempers shareholder dissatisfaction with the AC’s chosen auditor, particularly when there are concerns about impaired auditor independence. Disclosure mitigates AC career concerns, especially after financial reporting failures, and disclosure is associated with high audit quality. Additionally, we find that AC attributes indicating AC effectiveness do not alter the mitigating effect of disclosure on shareholder dissatisfaction and AC career concerns, but the positive effect of disclosure on audit quality is mainly evident when ACs have high attribute effectiveness. Evidence on the legitimacy implications of auditor reappointment disclosure is informative for constituents concerned about the effectiveness and transparency of the AC. Data Availability: All data used in the study are publicly available from sources cited in the text.