Foreign institutional ownership and auditor choice: Evidence from worldwide institutional ownership

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.

Determinants of auditor choice: Review of the empirical literature

“…Kim, Pevzner, and Xin () investigated the influence of foreign institutional investment on firms' auditor choice in an international setting and evidenced that the firms with higher foreign institutional ownership are more likely to hire Big 4 auditors. Further, Kim et al () found that foreign institutional investors from countries with strong (weak) governance institutions are more (less) likely to demand Big 4 auditors. Similar evidence was reported by Ben‐Hassoun, Aloui, and Ben‐Nasr () for a sample of Middle East and North Africa region countries, and by Karim et al () and Karim and van Zijl () for Bangladesh.…”

“…Firms with higher foreign ownership might favor weak corporate governance, because weaker internal governance will enable them to gain control over cash flow rights and thus to exploit minority shareholders. Kim, Pevzner, and Xin (2019) investigated the influence of foreign institutional investment on firms' auditor choice in an international setting and evidenced that the firms with higher foreign institutional ownership are more likely to hire Big 4 auditors. Further, Kim et al (2019) found that foreign institutional investors from countries with strong (weak) governance institutions are more (less) likely to demand Big 4 auditors.…”

Impact of Ownership Characteristics on Modified Audit Opinion in Jordan

“…Based on the CG standpoint, the influence of large shareholdings companies in developed markets is different from that in developing markets [36]. Foreign ownership as a significant external monitoring role of a company is anticipated to enhance the quality of financial reporting [37,39]. Alzoubi determined that the higher the level of FOOWN, the less probable the earnings management would happen and, thus, the quality of financial reporting would be greater [5].…”

The future of international business research on corporate globalization that never was…

“…Net efficiency-benefits reflect lower resource usage per unit of output, and the international diffusion of better industry practices, ranging from high quality accounting systems to proprietary technologies. Such types of outcomes have been clearly demonstrated in a large number of recent articles published in JIBS (see, inter alia, Berry, 2017;Brandl, Darendeli, & Mudambi, 2018;Ellis, Moeller, Schlingemann, & Stulz, 2017;Kano, 2018;Kim, Pevzner, & Xin, 2018;Koning, Mertens, & Roosenboom, 2018). The globalization of information flows has also dramatically increased the worldwide awareness of grand challenges such as climate change impacts and pollution of the oceans.…”