An Empirical Investigation of Stockholder Reaction to Disclosures Required by ASR No. 250

Abstract

The Securities and Exchange Commission (SEC) adopted Accounting Series Release No. 250: Disclosure of Relationships with Independent Public Accountants effective September 30, 1978 (SEC [1978a]). This release generally required public companies to disclose in their proxy statements (1) the percentage of fees for nonaudit services in relation to the audit fee (and percentage of fees for each nonaudit service in relation to the audit fee if the percentage exceeded 3%), and (2) whether the board of directors or its audit committee approved such services. This rule remained in effect until February 1982, when it was withdrawn because an SEC staff study found few companies reporting sensitive nonaudit services, and the SEC Practice Section of the AICPA Division of Firms subsequently required member firms to furnish information on the relationship of nonaudit fees to total fees for all SEC clients. Two aspects of the ASR No. 250 disclosures are of interest. The first is whether stockholders would perceive information regarding nonaudit services as a negative reflection on the independence of the auditor. The second (somewhat related) is whether in response to, or in anticipation of, stockholder reaction, managers and auditors changed the mix and/or extent of nonaudit services. In this study, we examined whether ASR No.