Auditor Pricing of Delisting Risk: Evidence from Reverse Stock Splits

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Abstract

Stock splits are corporate events that often involve either increasing the share price by reducing the number of shares outstanding (a reverse split) or reducing the share price and increasing the number of shares outstanding (a forward split). In theory, as the size of a pizza does not vary no matter how many slices one cuts it into, the market value of shareholders’ equity should not change when a firm does a stock split. However, research indicates that while stock splits are in theory value irrelevant, they contain relevant signals to market participants regarding the cash flow prospects of the splitting firm. In this paper, we investigate whether auditors price the signal embedded in a reverse stock split. We examine whether audit fees are higher for reverse stock split (RSS) firms vs. non-RSS firms.

Authors

• Kathleen Rankin, Morgan State University

• Kimberly Gleason, University of Pittsburgh

• Deborah Smith, Cleveland State University

• Bilal Makkawi, Morgan State University