The impact of audit oversight on price ratios, stock returns, and institutional ownership

Audit committees hire audit firms to uncover material misstatements and earnings management in financial statements. Audit committees report the audit findings and corrective action to the rest of the board. Effective audit oversight is effective governance in that it increases management accountability. This study uses audit oversight to predict: 1) price ratios including the price-earnings ratio, the price-to-sales ratio, and the price-to-book ratio; 2) stock returns, including holding period return, volatility of holding period returns, and stock price volatility; 3) institutional ownership in US pharmaceutical and energy firms from 2010-2022. Audit oversight quality significantly reduced price to sales, decreased holding period returns, decreased price volatility, and significantly increased institutional ownership suggesting that the immediate consequence of increased audit oversight is the reduction of overstated price ratios and returns. The restoration of these financial measures to realistic levels attracts investor interest in purchasing these securities.