Institutional Ownership and Audit Quality: Evidence from Russell Index Reconstitutions

45 Pages Posted: 9 Oct 2016 Last revised: 22 Oct 2019

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Hui Dong

Shanghai University of Finance and Economics - School of Accountancy

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: March 15, 2017

Abstract

This paper investigates the monitoring effect of institutional investors on portfolio firms’ audit quality. We identify an exogenous discontinuity in institutional ownership around the Russell index threshold to overcome the endogeniety concerns. We find that an exogenous increase in a firm’s institutional ownership significantly increases the readability of its 10-K forms. Furthermore, we show that higher ownership enhances the firm’s auditor committee effectiveness, induces the firm to appoint tough auditors, and increases its quality of internal controls. In addition, auditors perceive the reduction in agency costs and audit risk caused by the changed institutional ownership, and hence charge lower audit fees.

Keywords: Institutional Ownership, Indexing,Readability, Audit Quality, Audit Risk

JEL Classification: G23; G34; G14; M40; M42

Suggested Citation

Chen, Tao and Dong, Hui and Lin, Chen, Institutional Ownership and Audit Quality: Evidence from Russell Index Reconstitutions (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2849685 or http://dx.doi.org/10.2139/ssrn.2849685

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Hui Dong

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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