Foreign Institutional Ownership and Auditor Choice: Evidence from Worldwide Institutional Ownership

Journal of International Business Studies 50, 83-110

51 Pages Posted: 12 Jul 2016 Last revised: 4 Mar 2020

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Xiangang Xin

City University of Hong Kong

Date Written: July 8, 2016

Abstract

We investigate the influence of foreign institutional investors on firms’ auditor choices in an international setting. Foreign institutional investors are likely to demand high-quality audits to mitigate the information asymmetry they face and facilitate their external monitoring when they invest overseas. On the other hand, foreign institutional investors not only face difficulties in monitoring overseas firms in general but also have the limited ability to influence their auditor choices in particular. Using a large sample of 111,078 firm-year observations from 40 non-U.S. countries for the period of 2001–2011, we find that firms with higher foreign institutional ownership are more likely to hire Big 4 auditors. To address the endogeneity concern, we show that our findings are robust to the use of identification strategies exploiting the exogenous variation in foreign institutional ownership following MSCI index additions, two-stage least squares regressions, and change-on-change regressions. More importantly, we further explore cross-sectional/cross-country variations in the relation between foreign institutional investors and auditor choice and find that this relation is stronger (a) when foreign institutional investors are from countries with stronger governance institutions and (b) when the investee firms are located in countries with higher information asymmetries. Overall, our findings suggest that cross-border institutional investment plays an important role in influencing firms’ auditor choices and improving the information environment of firms across different countries around the world.

Keywords: Foreign Institutional Investors, Auditor Choice, Information Environment

JEL Classification: M40, M41

Suggested Citation

Kim, Jeong-Bon and Pevzner, Mikhail and Xin, Xiangang, Foreign Institutional Ownership and Auditor Choice: Evidence from Worldwide Institutional Ownership (July 8, 2016). Journal of International Business Studies 50, 83-110, Available at SSRN: https://ssrn.com/abstract=2807691 or http://dx.doi.org/10.2139/ssrn.2807691

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

Xiangang Xin (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
Hong Kong

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