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Journal of International Business Studies

, Volume 50, Issue 1, pp 83–110 | Cite as

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

  • Jeong-Bon Kim
  • Mikhail Pevzner
  • Xiangang XinEmail author
Article

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-US 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 agency theory 

Résumé

Nous étudions l’influence des investisseurs institutionnels étrangers sur les choix des cabinets d’audit dans un contexte international. Les investisseurs institutionnels étrangers sont susceptibles d’exiger des audits de haute qualité pour atténuer l’asymétrie d’information à laquelle ils sont confrontés et faciliter leur contrôle externe lorsqu’ils investissent à l’étranger. D’un autre côté, les investisseurs institutionnels étrangers ont non seulement des difficultés à surveiller les entreprises étrangères en général, mais ont aussi une capacité limitée à influencer les choix de leurs auditeurs en particulier. Utilisant un large échantillon de 111 078 observations d’entreprises-années provenant de 40 pays non-américains pour la période 2001–2011, nous constatons que les entreprises ayant une plus forte participation institutionnelle étrangère sont plus susceptibles d’embaucher des auditeurs du Big 4. Pour répondre au problème d’endogénéité, nous montrons que nos résultats sont solides face à l’utilisation des stratégies d’identification exploitant la variation exogène de la propriété institutionnelle étrangère suite aux ajouts d’indices MSCI, aux régressions des moindres carrés en deux étapes et aux régressions de changement sur changement. Plus important encore, nous explorons davantage les variations transversales/transnationales dans la relation entre les investisseurs institutionnels étrangers et le choix des auditeurs, et nous constatons que cette relation est plus forte (a) lorsque les investisseurs institutionnels étrangers proviennent de pays dotés d’institutions de gouvernance plus solides et (b) lorsque les entreprises détenues sont situées dans des pays présentant des asymétries d’information plus importantes. Dans l’ensemble, nos résultats suggèrent que l’investissement institutionnel transfrontalier joue un rôle important en influençant les choix des auditeurs des entreprises et en améliorant l’environnement informationnel des entreprises dans différents pays du monde.

Resumen

Investigamos la influencia de los inversionistas institucionales extranjeros en las selecciones de auditores de las empresas en un entorno internacional. Es probable que los inversionistas institucionales extranjeros exijan auditorías de alta calidad para mitigar la asimetría de información que enfrentan y facilitar su monitoreo externo cuando invierten en el exterior. Por otra parte, los inversionistas institucionales extranjeros no solo enfrentan dificultades para monitorear empresas extranjeras en general, sino que también tienen la capacidad limitada de influir en la selección de sus auditores en particular. Usando una gran muestra de 111,078 observaciones de empresa-año de 40 países no estadounidenses para el período 2001–2011, encontramos que las empresas con mayor propiedad institucional extranjera son más propensas a contratar a los auditores de las 4 grandes (Big 4). Para abordar el problema de la endogeneidad, demostramos que nuestros hallazgos son robustos al uso de estrategias de identificación que explotan la variación exógena en la propiedad institucional extranjera siguiendo las adiciones al índice MSCI, las regresiones de mínimos cuadrados en dos etapas y las regresiones de cambio en el cambio. Aún importante, exploramos más allá las variaciones transversales y entre países en la relación entre inversores institucionales extranjeros y la selección del auditor y encontramos que esta relación es más fuerte (a) cuando los inversores institucionales extranjeros provienen de países con instituciones de gobierno más sólidas y (b) cuando las empresas participadas están ubicadas en países con mayor asimetría de información. En general, nuestros hallazgos sugieren que la inversión institucional transfronteriza juega un papel importante al influir en las elecciones de los auditores de las empresas y mejorar el entorno de información de las empresas en diferentes países del mundo.

Resumo

Investigamos a influência de investidores institucionais estrangeiros na escolha do auditor de empresas em um cenário internacional. Investidores institucionais estrangeiros provavelmente exigem auditorias de alta qualidade para mitigar a assimetria de informações que enfrentam e facilitar seu monitoramento externo quando investem no exterior. Por outro lado, os investidores institucionais estrangeiros não apenas enfrentam dificuldades no monitoramento de empresas estrangeiras em geral, mas também têm capacidade limitada para influenciar escolhas de auditor em particular. Usando uma grande amostra de 111.078 observações empresa-ano de 40 países não norte-americanos para o período de 2001–2011, descobrimos que empresas com mais pronunciada propriedade institucional estrangeira são mais propensas a contratar auditores das quatro grandes. Para tratar da preocupação com a endogeneidade, mostramos que nossos resultados são robustos ao uso de estratégias de identificação que exploram a variação exógena na propriedade institucional estrangeira após inclusões ao índice MSCI, regressões de mínimos quadrados de dois estágios e regressões do tipo change-on-change. Mais importante ainda, exploramos ainda variações transversais e entre países na relação entre investidores institucionais estrangeiros e a escolha do auditor e descobrimos que essa relação é mais forte: (a) quando investidores institucionais estrangeiros são de países com instituições de governança mais fortes e (b) quando as empresas investidas estão localizadas em países com maior assimetria de informação. No geral, nossas descobertas sugerem que o investimento institucional transfronteiriço desempenha um papel importante em influenciar as escolhas do auditor das empresas e melhorar o ambiente de informações das empresas em diferentes países ao redor do mundo.

摘要

我们调查了国外机构投资者对国际背景下企业审计师选择的影响。外国机构投资者有可能要求高质量的审计, 以减轻他们面临的信息不对称, 并促进他们在海外投资时的外部监管。另一方面,外国机构投资者不仅在监管海外公司方面面临困难, 而且特别在影响审计师选择方面的能力是有限的。我们使用2001至2011年间来自40个非美国国家的111,078个公司年的观察值的大样本, 发现拥有较大外国机构所有权的公司更有可能聘请四大公司的审计师。为了解决内生性问题,我们显示我们的研究结果对MSCI指数增加, 两阶段最小二乘回归和变对变回归后利用外国机构所有权的外生变量的识别策略是稳健的。更重要的是, 我们进一步探讨了外国机构投资者与审计师选择之间的关系的跨部门/跨国差异, 并发现这种关系在如下情况下更强:(a)当外国机构投资者来自具有较强治理制度的国家时, 以及(b)当被投资公司地处信息不对称程度较高的国家。总体而言, 我们的研究结果表明, 跨境机构投资在影响公司审计师择和改善全球不同国家公司的信息环境方面发挥着重要的作用。

Notes

ACKNOWLEDGEMENTS

We gratefully acknowledge comments and suggestions from Gary Biddle (editor) and three anonymous referees, conference participants at the American Accounting Association’s 2017 Auditing Section Midyear Meeting, as well as from Ph.D. seminar/workshop participants from Fudan University (Shanghai, China), Sun Yat-sen University (Guangzhou, China), and the University of Waterloo (Ontario, Canada). Jeong-Bon Kim and Mikhail Pevzner also gratefully acknowledge the assistance they received through their respective roles as J. Page R. Wadsworth Chair in Accounting and Finance at the University of Waterloo’s School of Accounting and Finance and EY Chair in Accounting at the University of Baltimore’s Merrick School of Business. Xiangang Xin gratefully acknowledges the financial support from the SRG grant of City University of Hong Kong (7004524).

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Copyright information

© Academy of International Business 2018

Authors and Affiliations

  1. 1.Department of AccountingCity University of Hong KongKowloonHong Kong
  2. 2.Merrick School of BusinessUniversity of BaltimoreBaltimoreUSA

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