Foreign Institutional Ownership and Auditor Choice: Evidence from Worldwide Institutional Ownership
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2016-07-16
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Citation of Original Publication
Kim, Jeong-Bon, Pevzner & MikhailXin, Xiangang. (July 8, 2016). Foreign Institutional Ownership and Auditor Choice: Evidence from Worldwide Institutional Ownership.
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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.