Publication Type
Working Paper
Publication Date
3-2009
Abstract
In this study, we examine how institutional ownership affects the quality and riskiness of the financial statement audit. We hypothesize that institutional investors can influence corporate policy to employ governance mechanisms that reduce their monitoring costs. Our evidence shows that firms are more likely to hire a Big 4 auditor (our proxy for audit quality) when long-term institutional ownership is high, suggesting that long-term institutional investors view high quality audits as a viable means of improving corporate governance while reducing their direct monitoring costs. We find no association between auditor choice and short-term institutional ownership. Next, we find that auditors charge higher fees (our proxy for audit risk) when short-term institutional ownership is high, consistent with short-term investors creating greater incentives for managers to act myopically. We find no association between audit fees and long-term institutional ownership. Taken together, our evidence suggests that dedicated long-term institutional investors demand higher quality audits to enhance corporate monitoring, and that short-term institutional ownership is positively associated with higher audit risk.
Keywords
Audit quality, Institutional ownership, Monitoring, Audit risk, Corporate governance
Discipline
Business Law, Public Responsibility, and Ethics | Corporate Finance
First Page
1
Last Page
35
Identifier
10.2139/ssrn.1438632
Citation
HAN, Soongsoo; KANG, Tony; and REESC, Lynn.
The association between institutional ownership and audit properties. (2009). 1-35.
Available at: https://ink.library.smu.edu.sg/soa_research/1751
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.1438632