Foreign Institutional Ownership and Auditor Choice: Evidence from Worldwide Institutional Ownership

• In Event: Demand for Audits and/or High-quality Audits

Abstract

We investigate how the demand for higher quality audits outside of the United States is affected by the type of institutional investors, foreign versus domestic. Consistent with the notion that foreign institutional investors (compared to domestic institutional investors) are more informationally disadvantaged, in a large sample of firm-year observations from 41 non-U.S. countries, we find that foreign institutional investors play a more important role in influencing firms’ auditor choices. This effect is stronger when the firms they invest in have more severe information asymmetries, either at the country level or at the firm level. We further find that the effect of foreign institutional investors on auditor choice concentrates on institutional investors originating from countries with stronger governance institutions. Overall, our findings suggest that cross-border institutional investment serves as an important channel in influencing firms’ auditor choices and improving the information environment of firms around the world.

Authors

• Jeong-Bon Kim, University of Waterloo

• Mikhail Pevzner, University of Baltimore

• Xiangang XIN, The Chinese University of Hong Kong