The Association Between Institutional Ownership and Audit Properties

40 Pages Posted: 27 Jul 2009

See all articles by Sam Han

Sam Han

Korea University Business School

Tony Kang

University of Nebraska - Lincoln

Lynn L. Rees

Utah State University - School of Accountancy; Utah State University - Huntsman School of Business

Date Written: July 24, 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

JEL Classification: M49, G34

Suggested Citation

Han, Sam and Kang, Tony and Rees, Lynn L., The Association Between Institutional Ownership and Audit Properties (July 24, 2009). Available at SSRN: https://ssrn.com/abstract=1438632 or http://dx.doi.org/10.2139/ssrn.1438632

Sam Han

Korea University Business School ( email )

Anam-Dong 5 Ga, Seongbuk-Gu
Seoul, 136-701
Korea, Republic of (South Korea)
+82-2-3290-2839 (Phone)

Tony Kang (Contact Author)

University of Nebraska - Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Lynn L. Rees

Utah State University - School of Accountancy ( email )

College of Business
Logan, UT 84322-3540
United States

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435-797-2272 (Phone)

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