Distracted Institutional Investors and Audit Risk

Posted: 7 Oct 2019

See all articles by Hai Wu

Hai Wu

Australian National University (ANU) - College of Business and Economics

Jingyu Yang

City University of Hong Kong

Yangxin Yu

City University of Hong Kong

Date Written: September 26, 2018

Abstract

We use a newly developed institutional investor distraction measure (Kempf, Manconi, & Spalt, 2016) to examine whether auditors charge higher audit fees and exert higher efforts when their clients’ institutional investors temporarily reduce their monitoring activities. We find that audit fees and audit report lags increase significantly during periods when institutional investors are distracted. This effect is stronger when dedicated institutional investors are distracted. We further show that the positive association between the investor distraction measure and audit risk measures declines in the post-Sarbanes–Oxley Act period. Collectively, our results suggest that institutional shareholders monitoring activities benefits auditors by reducing audit risks. This paper also shows that the negative effect of investors’ limited attentions on corporate monitoring can to some extent be mitigated by auditors.

Keywords: institutional investor distraction; audit risk; audit fee; audit lag

JEL Classification: G23, M4

Suggested Citation

Wu, Hai and Yang, Jingyu and Yu, Yangxin, Distracted Institutional Investors and Audit Risk (September 26, 2018). Available at SSRN: https://ssrn.com/abstract=3459852

Hai Wu

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia
261253586 (Phone)

Jingyu Yang

City University of Hong Kong ( email )

Hong Kong

Yangxin Yu (Contact Author)

City University of Hong Kong ( email )

Hong Kong

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